What is a Probate Sale?

Key Takeaways

• Probate properties typically are typically less expensive than properties sold on the market and are potentially good opportunities for real estate investors and “flippers” – investors who purchase, rehabilitate, and sell properties for profit.

• In real estate, a probate sale is usually necessary when a property owner dies without leaving a will directing what happens to the property, or if will terms are unclear.

• If the buyer has neither the time, money, nor inclination to tackle repairs, buying a probate property may not be the right move.  

Real estate investors and homebuyers overall would do well to understand probate sales, since such properties can be cheaper, compared to non-probate properties, and generally have less competition. But just what is a probate sale? Here is that – and more.

What is a Probate Sale?

In real estate, probate sale is usually necessary when a property owner dies without leaving a will directing what happens to the property, or if will terms are unclear. In other words, a probate sale is a property transaction that is under the probate court’s supervision.

To sell the property, the late owner’s heirs must go through probate. After the probate process begins, and the property is sold, proceeds are distributed to the heirs after all taxes and debts are paid.

Such properties typically sell at a lower price overall and are potentially favorable opportunities for real estate investors and “flippers” – investors who purchase, rehabilitate, and sell properties for profit, usually in relatively short order. Also, since there is less demand for such properties, they are easier to attain.

Note that rules regarding probate differ from state to state, but in general, steps include appointing an administrator or executor, having the property appraised, petitioning the probate court to begin the sale, listing the real estate, and asking the court to approve the sale.

How Does a Probate Sale Work?

Usually, when an individual dies, they leave behind a will that details what they want done with their assets, in this case, their property.

Probate sales, then, usually occur when a property owner dies without a will that leaves the real estate to someone or dictates that the property should be sold with proceeds split among heirs.  

Generally, the reason the property must be sold through probate court is because the court is responsible for the estate until it is closed. 

Typically, a court-designated personal representative handles duties associated with estate disbursement. This administrator has no claim to asset ownership, nor do they have any power in the transaction. Their tasks include collecting cash for the property’s sale, paying any creditors, and distributing any funds leftover to the deceased beneficiaries and heirs.

For the seller, one of the first orders of business is posting the listing through a real estate agency, then showing and ultimately selling the property. The court must approve any sale, which can take several months – up to a year — depending on the buyer and how long it takes for them to move forward to sale completion.

Because the entire process can be complicated and lengthy, it is common for administrators to employ an estate lawyer to handle the process, a person experienced in probate sales, or both. Buyers will likely work with the representative, the court, or a real estate attorney to make an offer.

Note that there are also instances in which the property must be sold by the appointed representative to satisfy outstanding debts, since such obligations follow the estate when the property owner dies. 

The probate court identifies any and all creditors — which often are contractors, mortgage lenders, credit card issuers, or anyone else the decedent owed – before the property is listed for sale. Identification of creditors will not affect buyers who are interested in the property.

How are Probate Sales Different from Normal Home Sales?

There are characteristics of probate sales that distinguish them from traditional property sales, namely, that most probate properties are sold “as is.” This is usually because the heirs do not wish to underwrite renovations or updates, or because they cannot pay for them. Perhaps the previous owner had health issues or was elderly, rendering maintenance challenging. Thus, it is always a good idea to pay for a property inspection, to see whether there are hidden and potentially expensive issues. Even then, some issues can go unnoticed.

Also, with probate sales, the buyer must put down a deposit when submitting an offer, which is in addition to their down payment. The deposit can also be put into the down payment and will comprise 10 percent of the property’s sale price. 

Some states will permit the real estate to remain listed and let others make offers. If outbid, the original buyer should get their deposit back. However, unless they make a higher bid, they will lose out on the property. 

Selling a probate property also will likely take longer than it does with a regular sale, largely because the transaction requires court approval, and the overall buying process is inherently lengthy.

How to Buy Probate Real Estate

Those who have familiarized themselves with purchasing through probate and are interested in pursuing such should first find a suitable property. Because such real estate is not typically listed on the usual platforms, identifying a possible property can be an ordeal.

One strategy – practical, if morbid – is checking obituaries and records to see whether any deceased individuals owned property in areas in which there is interest. Also, the investor or homebuyer can comb through local newspapers for notices of petition to administer estates, or for notices to creditors. Such approaches can help the buyer find a property that is soon to be listed for sale.

Before making an offer on a property, it is wise to get an idea of the property’s value. A good way to do so is by seeking out comparable properties in the area. Look for neighborhood houses that are comparably sized, with the same number of bedrooms, and the like. It also may be smart to check out recent sales data to establish how much to offer.

After the estate representative accepts the offer, the court must approve it before the buyer can take possession. Note that while probate sales do not necessarily require cash, a cash offer can have extra appeal to the seller, just as with most other real estate transactions. Also, understand that purchasing real estate is generally complex, so hiring an attorney who is familiar with the probate process can make the transaction smoother.

Pros and Cons of Buying on a Probate Sale

A probate sale isn’t for everyone. For some, the deciding factor boils down to priorities: what is more important, getting a good price or getting a property quickly? It is true that it is common for probate homes to sell for less than market value. However, the process can be more protracted.

Another factor in deciding whether to try for a probate property is, if need be, whether the buyer is able and willing to make repairs or perform renovations. In what would perhaps be an ideal situation, the buyer would possess the skills, ability, and wherewithal to do the work themselves, or at least to hire professionals. Individuals who flip properties often use probate to locate cheaper properties, do the needed work, and resell them for a profit.

However, if the buyer has neither the time, money, nor inclination to tackle repairs, buying a probate property may not be the right move.  Also, some buyers prefer the familiarity, or comfort, of being “in the know.” With probate sales, it is common for the buyer to know relatively little about the property when buying through probate.  There are times when, even after getting an inspection, the buyer will still wind up with expensive problems.

Ultimately, the buyer must weigh the benefits and potential drawbacks of purchasing property through probate court. 

Pros:

• Because fewer people are generally interested in probate sales, there is less competition to purchase the property.
• Opportunities to buy probate properties may not be available via the usual channels, giving the buyer a possible leg up on the market.
• Properties in probate sale are frequently priced under what they would be otherwise.

Cons:

• The transaction may be comparatively more complicated with probate sales due to additional regulations.
• Many properties in probate sale are in substandard condition and in need of extensive or costly repairs, or both.
• The transaction can take much longer than for non-probate sales. 

Investing in Real Estate: Diversify Your Portfolio Through Yieldstreet

While there are no risk-free investments, real estate has been popular for years and remains so. After all, benefits include potential secondary income streams, leverage, cash flow, and tax favorability.

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Yieldstreet also has an abundance of real estate opportunities, private as well as commercial, and including a real estate investment trust. Such trusts permit capital investments in real estate without having to possess the physical property. As enterprises, REITS own commercial properties including retail structures, apartment buildings, hotels, and office buildings.

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Portfolio Diversification and Alternative Investments

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

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Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Property bought through probate does offer advantages, chiefly regarding price. Investors should take note of potential drawbacks, however, including the likely necessity for possibly extensive renovations and repairs, and a long wait period for sale approval and completion.