SELLING REAL PROPERTY DURING PROBATE
I. INTRODUCTION The sale of real estate in a probate administration proceeding presents a number of traps for the uninitiated. Failure to strictly comply with all of the requirements can result in a failure of the sale and the requirement that the process start over. Prior to any sale, it is a wise idea to spend time with counsel for the personal representative to make sure all the requirements have been satisfied.
II. WHAT IS PROBATE? Probate is a system where the affairs of a deceased individual (aka the "Decedent") can be managed in an orderly manner. Probate involves the following basic steps: a. Filing of the petition and, if applicable, proving of any will; b. Appointment of a personal representative (executor, administrator, etc.); c. The marshal and management of assets, including sale of real property; and d. Accounting, closing the estate and distributing assets. In California, the process usually takes at least nine months and can last years. In Los Angeles County, a typical probate estate is processed in 12-14 months.
III. WHAT ARE THE NECESSARY STEPS TO ACCEPT AN OFFER TO SELL REAL PROPERTY IN A PROBATE ADMINISTRATION PROCEEDING? a. First ask: Must the property be sold pursuant to court confirmation? Some but not all sales must be sold pursuant to a process known as court confirmation. Usually the determination depends on whether or not the personal representative has been given full or limited powers under the Independent Administration of Estates Act (IAEA). But even in the presence of full IAEA powers, some personal representatives still insist on selling via the court conformation process for liability reasons. b. Next ask: Are there directions about the sale of the real property? Some wills contain instructions about how or when real property assets should or must be sold. The court has possession of any will and considers the issue before authorizing any sale. This is an issue that should be examined by the personal representative and counsel before the sale process is commenced. c. Before accepting an offer: Has the estate published notice of the sale? Publishing notice of sale is a step that is frequently overlooked, if not coordinated with counsel, and can result in a denial of the petition. If the personal representative intends a private sale (most common), the notice must indicate the day on or after which offers will be accepted. If the personal representative intends to auction the property, the notice must list the date of the auction. It is a wise idea for the agent to review the proposed notice of sale prior to publication and insure the accuracy of the following items: a. Is the property description and address accurate? b. Are the terms of the sale accurate? c. Are the terms of the sale 'as is' and conditioned on court approval? d. Has an offer been accepted after notice of sale has been published? No matter how attractive an offer, it cannot be accepted until after the time to publish has expired. If the personal representative accepts an offer prior to the expiration of the notice period, the offer is invalid and the sale process must start anew. Before you let any personal representative accept an offer, make sure you have conferred with counsel and are certain that it is time to accept an offer. e. What is the commission amount? In Los Angeles County, total commissions shall not exceed five percent (5%) for improved property and ten percent (10%) for unimproved property. It is also important to remember that there is a prohibition on paying a commission where the agent, directly or indirectly, is a purchaser of the property. f. Are you selling something less than a 100% interest in real property? Unlike a private sale, a personal representative selling real property subject to court confirmation has limitation on selling partial interests. In particular, a partial interest cannot be sold without consent of the co-owners. If such consent is not obtained, and the property must be partitioned prior to any sale occurring. g. Before the confirmation hearing, has the personal representative obtained a current appraisal? Real property can only be sold pursuant to court confirmation if the sale price is 90% of the appraised valuation, and the appraisal is less than one year old. But do not call your favorite appraiser. In probate proceedings, all assets must be appraised by the probate referee; make sure counsel has a current appraisal.
IV. AFTER AN OFFER HAS BEEN ACCEPTED: THE CONFIRMATION HEARING a. Starting the confirmation process and notice to all interested parties and their realtors. The sale confirmation process is started by the personal representative (through an attorney) filing a petition to confirm sale of real property. In Los Angeles County, the petition is usually scheduled for hearing three to six weeks after it is filed with the court. Notice of the court confirmation hearing should be given to all parties and their agents. b. Continue marketing and allowing inspections of the real property. Acceptance of any offer is conditioned on court confirmation. Any qualified buyer can appear at the conformation hearing on the date of sale and submit a bid. During this period, the agent should make sure any potential buyer and his or her agent has a reasonable opportunity to inspect the property. Failure to allow such an inspection can result in a continuation of the confirmation hearing. c. Know that the sale can only go forward if the buyer or a representative of the buyer is present. Make sure your accepted bidder or his or her agent will be present at the court confirmation hearing. Failure to appear can result in the court denying the sale, forcing the process to restart, and subjecting the potential buyer to damages for having to conduct the confirmation hearing a second time. Also a potential buyer can be overbid by another buyer if he or she is not present in court. d. Overbidders and qualifying for the sale. One of the more exciting but stressful aspects of probate sales is the fact that nothing is final until the judge drops the gavel. The process is designed to maximize exposure to the market. Anyone representing a potential overbidder should be prepared with good funds for a deposit (frequently 10% of the first overbid price) and qualification for financing for the balance. Failure to bring these items to the hearing can preclude a potential bidder. If you represent a buyer, it is a good idea to contact the listing agent and advise them of your client's intent to appear and bid. All agents should be present early to meet and review qualification for bidding. e. The first Overbidder and subsequent bids. The first overbid in any sale is an amount equal to the accepted offer, increased by five percent (5%) plus $500. Subsequent bids are then determined by the judge and are usually in amounts ranging from $1,000 to $5,000, depending on the value of the property. There is no mystery to the process although decisions must be made fast and potential buyers are well advised to have considered the financial limits. In Los Angeles County, overbidders must complete and be prepared to submit to the court (if they are the successful bidder) an overbid form also titled "Bid in Open Court on Sale of Real Property", which is available on the Los Angeles County Superior Court's web site (www.lasuperiorcourt.org). The Bid Form requires details on the names of the purchase, sale terms, commission division and manner of vesting. The parties should also be prepared to orally advise the court the manner in which the buyer wants title of the property vested.
V. HOW CAN I AVOID PROBATE? The main focus of estate planning is avoiding probate, for many of the reasons listed above. As far as real estate is concerned, there are currently two commonly used methods which allow real estate to avoid probate: joint tenancy and a trust. Because of the limitations of joint tenancy, anyone in California with real estate should have a trust-based estate plan.