In this article, I want to tackle the legal subject of
probate. This may sound like an odd topic for real estate
investors, but, in fact, you can often find good
investments when someone passes away.
It's a fact of human nature that inheritors of probate
estate will often want to sell that property quickly to get
the money and aren't always concerned about getting full
value from the home. Or, they may live out-of-state and
simply not realize the full value of the property. When
these situations occur, the opportunities for bargains
arise!
What is Probate? The term "probate" comes from the Latin
word "probatum" meaning "prove." In other words, the
probate is a legal process by which it's proved that a will
is (or isn't) authentic.
Specific procedures vary by state, but probate generally
includes the following steps: * When a person dies, the
will is filed with the local probate court (sometimes
called a "surrogate" or "chancery" court). An inventory is
then taken of the property. The property is appraised for
its value. Assuming the will is determined valid in court,
any legal debts (including death taxes) must be paid. After
debts and fees are paid, the property is distributed as
dictated by the will.
You may wonder what happens if the will isn't valid or no
will was left. In that case, the estate still must go
through a intestacy"("without a will") proceeding. This
means the property is distributed to the closest relatives
as dictated by state law.
Since you may be involved personally in probate proceedings
(as distinct from an investor's point of view), it pays to
know the advantages and disadvantages of the probate system.
Advantages of the Probate System - Probate makes sure that
only your beneficiaries receive your property. In other
words, it prevents fraud. Creditors have to prove their
claims against the estate. The probate process can resolve
any disagreements involving your estate and disposition of
your assets.
Another advantage is that the probate process limits the
time creditors have to make claims against the estate.
There's a "statute of limitations." So, if creditors don't
make their claims within the specified time period, those
claims are no longer enforceable.
Disadvantages of the Probate System - In the opinion of
many critics, it costs way too much for the services
rendered. They claim that probate provides no real
benefits, except to provide lawyers with excessive fees.
An AARP study concluded that the probate process can
generate legal fees of 12%-20% of the estate for the lawyer
alone. It also concluded that probate can reduce the estate
passing to one's heirs by 5% or more. Source-
http://www.aarp.org
In a few states, the fees are based on a percentage of the
estate. Fees may be based on "gross" probate estate.
Additional costs may include court costs, appraiser's fees,
etc. Also, basic fees may be set by statute. In addition,
if "extraordinary" services are performed, the
attorney/executor can ask for additional fees.
A second criticism in terms of the fees charged is that
probate is primarily a clerical and administrative skill.
Because of this fact, critics say there's no necessity for
court proceedings or the research, legal and adversarial
skills of a lawyer. They make the claim that the process
normally is handled by the lawyer's secretary anyway or by
a probate form preparation company. The result is that the
beneficiaries end up paying far too much for the services
rendered.
Critics also charge that probate proceedings consume too
much time. On average, a typical probate proceeding can
take between one and two years. During that time, the
beneficiaries generally get nothing or, perhaps, a "family
allowance" dictated by a judge.
Since probate can be expensive, I'll give you a list of
legal avoidance techniques you can use for your personal
situations. Because these techniques are not the main focus
of this article, I urge you to investigate them on your
own. Exemption of certain small amounts of property left
by will from probate (depends on state) Living trusts
Transfer on death registration for stocks and bonds Gifts
made while you're alive. Joint tenancy or tenancy by the
entirety Life insurance Pay-on-death financial accounts
Retirement accounts
How To Find Probate Estate Properties - Such properties can
be hard to find, but there are several sources you can
contact.
One source is real estate agents. Contact them to let them
know you're interested in such properties, but be sure to
specify the type of properties you're seeking and how much
you want to spend.
A second source is newspapers. Look at the obituary notices
and then check with local property records to determine if
the deceased owned local real estate.
Another source is the estate executor. An executor is the
person in charge of selling the estate property so he or
she is the person you'll need to go through in order to
make a buy.
A final source is public records. Wills in probate are a
matter of public record, so you can check for them at the
local court house or other local governmental agency.
Benefits of Buying Probate Properties - A primary advantage
of buying probate properties is great prices! Prices of
many of these properties can be as much as 30 to 40% below
market value.
Another benefit is a big inventory. The bad news is that we
all die. The good news (for the living, anyway!) is that
there will always be many probate properties available.
A third advantage is that it's a buyer's market. Many
beneficiaries don't really want an inherited property; they
simply want the cash from the sale of that property, even
if it's a below-market price.
Many beneficiaries also don't want the responsibilities
that come along with the inherited property; estate taxes,
repairs, maintenance, the mortgage payments, and so forth.
So, they're willing to sell at bargain prices.
The Disadvantage of Buying Probate Properties - The
identification and buying of probate properties will
require patience on your part. Remember, it can take
anywhere from six months to two years (or more!) to
complete the probate process).
As I said earlier, know the type of probate property you're
willing to buy and the amount of money you're willing to
spend to get it. If you work with a real estate agent,
communicate those guidelines to him or her so they don't
waste time on properties you're not interested in.
Key Point: Do your research, work closely with realtors,
and have patience!
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Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
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