probate needed for short sale?

22 Replies

This is my first time dealing with a short sale in which the owner on title is deceased.  The owner's son is considered the executor of the estate, according to the bank, but there is no legal trust set up.  We're close to getting an approval for an offer, and the subject of probate came up.  My broker is stumped in this situation as well; because the property is being sold as a short-sale, and there is no profit to be made, is the probate process even necessary?  Anyone have any experience or insights?  I want to prepare myself and my clients before we get in any deeper.

Hi

If there is no profit, why are you looking? You have  2 complex processes on your hands. Many details to consider. Tip: any Attorney will give you a few minutes of free time on the phone. They will blow it out of proportion somewhat, but that is your first step.

You mean there was no will? You are then at the mercy of courts decision. Find out what that is. Its public information. Go to the Probate Court house for your county. Be very polite and ask to see that file. Best to have Name of deceased, property address (did he live there) and date of death.

The fact that it is a short sale is irrelevant.  Does the "executor" have the court authorized power to sell the sell the property?  This is the only question.  Since you mentioned the son "is considered the executor", "by the bank" I'm guessing the son has no legal authority.  If not, then CA law will dictate, as to probate.  Someone competent in these matters, ie. title co., should have reviewed title for other liens and encumbrances at the outset of this process, and they could/should have advised on local probate/inheritance requirements.

You say the property is not in a trust.  So, is the property currently in the name of the decedent?  If so, it's owned by their estate.  Only someone with probate court approval can sell the estate's property.  The son says he is the executor but what does that mean? Is there an open probate case for the estate?  

Who signed the listing agreement and purchase agreement?  The son shouldn't have signed without proof of letters or being appointed executor.  Or rather the agent made a mistake if they let a person not on title and without court orders sign listing and purchase agreements.

The agent needs to know what he is working with here as it may be a dead deal.  It's not often that heirs will open a probate for an estate with nothing in it.  Perhaps the son has court approval?  But find out asap.  Just because the bank is willing to work with the heir/exec on the short sale doesn't mean the title company will allow him to sign a deed.  

Originally posted by @K. Marie Poe:

... it may be a dead deal.  ...

Was that pun intentional?  :)

Originally posted by @Wayne Brooks:

The fact that it is a short sale is irrelevant.  Does the "executor" have the court authorized power to sell the sell the property?  This is the only question.  Since you mentioned the son "is considered the executor", "by the bank" I'm guessing the son has no legal authority.  If not, then CA law will dictate, as to probate.  Someone competent in these matters, ie. title co., should have reviewed title for other liens and encumbrances at the outset of this process, and they could/should have advised on local probate/inheritance requirements.

I'm going to guess that there's been no title report yet as there is probably no open escrow while the short sale is being negotiated.  The title company won't necessarily know the owner is deceased, but the title report would call out the fact that seller isn't the owner and would request a poa or court authority to sign on the behalf of the owner.

It freaks me out a bit when I read that an agent is "stumped" when it comes to what is required when selling a decedent's real property.  Do they just accept signatures on listing and purchase agreements from anybody that says they can sell and then hope it all works out?  :)

Originally posted by @Steve Babiak:
Originally posted by @K. Marie Poe:

... it may be a dead deal.  ...

Was that pun intentional?  :)

 Stay tuned.  There's more where that come from!

Just because someone has obtained their real estate agent's license does not mean that they have so much as a clue about what makes a deal. 

To think that the agent did no research as to status/condition of title should not surprise experienced probate investors.

Interesting how many people were drawn to this thread only to see that the OP was relying on the knowledge of the real estate agent (sigh).  

Originally posted by @Rick Harmon:

Just because someone has obtained their real estate agent's license does not mean that they have so much as a clue about what makes a deal. 

To think that the agent did no research as to status/condition of title should not surprise experienced probate investors.

Interesting how many people were drawn to this thread only to see that the OP was relying on the knowledge of the real estate agent (sigh).  

Actually, on second reading it looks like the OP is the agent working the short sale and was referring to her supervising broker being stumped. Double sigh. 

Are agents required to do any kind of due diligence when it comes to who can sign on behalf of a seller? Can I just show up and say I want to sell a dead relative's property and they'll take my word that I have powers to sell?

I'm worried about what is in everyone's best interest. The reason I've never done a probate short sale on an upside down house is because it doesn't benefit the estate in any way and could possibly create extra exposure or tax liability. Often the probate attorney advises the executor to just let it foreclose in the name of the decedent. That way the estate doesn't take on the tax or deficiency liability. I've never wanted to cross that advice and put a target on my back.  But I'd love to be corrected if that's wrong! 

This question sort of  just came up on a different post. Here was my reply:

"I have had good success getting approvals with probate / shortsale properties (less paperwork because the borrower is deceased) but the discounts have been @20% of FMV / as-is value (which if the house needs a lot of repairs works for me (I provide constrution bids, police reports, ect...)." Also I have noticed that if the loan servicing is outsourced by the lender/bank that most of the short sales dealing with deceased borrowers has gone to Fay Servicing out of Chicago. That could be random but the last 3 in a row (of this type of deal) have been with them & they tell me they have a lot more that are upside down.

Hope this helps

K. Marie, I think that you are right. 

So, I guess I won't be asked to speak at my local real estate board meeting any time soon.

I've had a CA real estate brokers license for an awfully long time. I don't make a big point of telling people this because there's not much impressive about that. I don't list properties for others and I don't work for tips, either. However, when I do encounter an opportunity, I do initiate basic research as to condition of title and equity. To do otherwise would lead me to be in the identical position as the OP and her broker...flummoxed.

I completed a probate short sale last year in CA and it was profitable for all involved. CA state statute calls for attorney and executor fees to be paid by the bank in a probate short sale. The bank will refuse to pay unless the judge handling the probate issues an order for them to pay.

Originally posted by @Richard Vandenberg:

I completed a probate short sale last year in CA and it was profitable for all involved. CA state statute calls for attorney and executor fees to be paid by the bank in a probate short sale. The bank will refuse to pay unless the judge handling the probate issues an order for them to pay.

Do you have that statute?  Are you sure that's what happened? That doesn't sound right.  The lender isn't required to pay any fees to anyone in a short sale.  They have the choice to accept the discounted payoff, or not.  They are a secured creditor and can foreclose if they don't want to accept a short sale offer.  A probate judge cannot force the lender to accept a short sale. Was there a bankruptcy involved?  Better yet, I'd like to read the case!

This is the probate statute:

CALIFORNIA CODES PROBATE CODE SECTION 10360-10363

10360. As used in this article:
(a) “Amount secured by the lien” includes interest and any costs
and charges secured by the lien.
(b) “Encumbered property” means real or personal property that is
subject to a lien for a secured debt which is a valid claim against
the estate and which has been allowed or approved.
(c) “Lien” means a mortgage, deed of trust, or other lien.

10361. (a) If encumbered property is sold, the purchase money shall
be applied in the following order:
(1) Expenses of administration which are reasonably related to the
administration of the property sold as provided in paragraph (1) of
subdivision (a) of Section 11420.
(2) The payment of the expenses of the sale.
(3) The payment and satisfaction of the amount secured by the lien
on the property sold if payment and satisfaction of the lien is
required under the terms of the sale.
(4) Application in the course of administration.
(b) The application of the purchase money, after the payment of
those expenses set forth in paragraphs (1) and (2) of subdivision
(a), to the payment and satisfaction of the amount secured by the
lien on the property sold shall be made without delay; and, subject
to Section 10362, the property sold remains subject to the lien until
the purchase money has been actually so applied.

10361.5. The personal representative or any interested party may,
at any time before payment is made to satisfy all liens on the
encumbered property sold, petition for an order determining the
amount of expenses of administration that are reasonably related to
the administration of that encumbered property as provided in
paragraph (1) of subdivision (a) of Section 11420. The petition may
be heard as part of a petition for confirmation of sale of personal
or real property as provided in Section 10260 or 10308, respectively
or may be heard separately. If the petition is presented as part of a
petition for confirmation of sale of real or personal property, the
notice of hearing otherwise required by this code for a petition for
confirmation of sale shall be given in addition to the notice
requirements under Section 10361.6.

10361.6. (a) At least 30 days prior to the day of the hearing, the
petitioner shall cause notice of the hearing and a copy of the
petition to be served in the manner provided in Chapter 4 (commencing
with Section 413.10) of Title 5 of Part 3 of the Code of Civil
Procedure on all of the following persons:
(1) The personal representative, if the personal representative is
not the petitioner.
(2) The holder of any mortgage or other lien secured by the
property that is sold.
(3) All agents or brokers entitled to compensation from the
proceeds of the property that is sold.
(b) Except for those persons given notice pursuant to subdivision
(a), notice of the hearing, together with a copy of the petition,
shall be given as provided in Section 1220 to all of the following
persons:
(1) Each person listed in Section 1220.
(2) Each known heir whose interest in the estate would be affected
by the petition.
(3) Each known devisee whose interest in the estate would be
affected by the petition.
(4) The Attorney General, at the office of the Attorney General in
Sacramento, if any portion of the estate is to escheat to the state
and its interest in the estate would be affected by the petition.
(c) The court may not shorten the time for giving the notice of
hearing under this section.

10362. (a) If encumbered property is sold, the purchase money, or
so much of the purchase money as is sufficient to pay the amount
secured by the lien on the property sold and the expenses of the
sale, may be paid to the clerk of the court. Upon the payment being
so made, the lien on the property sold ceases.
(b) The clerk of court without delay shall use the money paid to
the clerk under this section to pay the expenses of the sale and to
pay and satisfy the amount secured by the lien on the property sold.
The clerk shall at once return the surplus, if any, to the personal
representative unless the court, for good cause shown and after
notice to the personal representative, otherwise orders.

10363. (a) At a sale of real or personal property subject to a
lien, the lienholder may become the purchaser of the property, even
though no claim for the amount secured by the lien on the property
sold has been, or could have been, filed, allowed, or approved.
(b) Unless the property is sold subject to the lien:
(1) If the lienholder becomes the purchaser of the property and
the amount secured by the lien on the property is a valid claim
against the estate and has been allowed or approved, the receipt of
the lienholder for the amount due the lienholder from the proceeds of
the sale is a payment pro tanto.
(2) If the lienholder becomes the purchaser of the property and no
claim for the amount secured by the lien on the property has been
filed, allowed, or approved, the court may at the hearing on the
petition for confirmation of the sale examine into the validity and
enforceability of the lien and the amount secured by the lien, and
the court may authorize the personal representative to accept the
receipt of the lienholder for the amount secured by the lien as
payment pro tanto.
(3) If the lienholder becomes the purchaser of the property and
the amount for which the property is purchased is insufficient to pay
the expenses of the sale and to discharge the lienholder’s lien,
whether or not a claim has been filed, allowed, or approved, the
lienholder shall pay to the clerk of the court an amount sufficient
to cover the expenses of the sale.
(c) Nothing permitted under this section shall be deemed to be an
allowance or approval of a claim based upon the lien or the amount
secured by the lien.

Originally posted by @Richard Vandenberg:

This is the probate statute:

CALIFORNIA CODES PROBATE CODE SECTION 10360-10363

I am familiar with this code.  It does not say anything about requiring a lender to pay attorney and executor fees.  It covers the priority of how funds from a sale are to be applied.  A lender is never required to accept the terms of any short sale offer and cannot be forced by a probate judge to do so.  If the lender agreed to a reduced payoff to cover attorney and executor fees, it was because they agreed to such terms in order to facilitate the sale. They could have walked from the offer at any time.  

Richard Vandenberg - Nice try, but that statute only refers to powers available to PR but does nothing to create a superpriority claim as to the cost of administration over secured creditors such as a mortgage (trust deed) lender. 

It can be accomplished with a court Order that cites the correct statute, but which I will not provide publicly because it has been abused beyond the scope and intent of the courts. I don't know of a single bench officer in any of the Southern California probate courts that will approve such an order now. 

BTW, the retired former Long Beach probate judge was a guest speaker at my  2011 seminar, Probate Secrets Unlocked, as was my friend (and competitor) JB, as well as a key area probate attorney.

I know there was a guy running around SoCal promoting that he put probate short sales together. Given the legal climate change since court consolidations, I'd be surprised if anyone would still want to do these, but who knows?

Apologies for posting wrong statue. I'm on vacation and tried to find my emails relating to this case and couldn't. Not trying to post inaccurate information. Next time I will fully read the info I post.

My reading of the statute is that @Richard Vandenberg is mostly correct.  10361(a)(1) says that administration fees and costs of the sale are a higher priority than the security interest.  The only difference is it only applies to those expenses related to the sale.  You might note that paying the secured lien is #3 in the list of priority.  So if the bank agreed to the sale probate fees and expenses related to the sale of the property get paid before the lien.  In many states the fees of the Executor/trix are a percentage.  So if a house was sold for $100,000 and the fee was 2% then the executor would get paid $2,000 from the sale and the real estate agent would get paid his fee before the bank got money.  The fee for the attorney would seem to fall into the same category making it also prior in priority to the payment of the lien holder.  I would think that @Account Closed would be right though that the probate court could not order a short sale over the objection of the mortgage holder.  I have never heard of a probate court having the power of a bankruptcy trustee to stop a foreclosure.  Good job Richard.

Jerry - yeah, I know that's what the code says. However, lenders didn't really see the effects of super-priority claims for a long time and just foreclosed on a decedent like any other secured lender. 

I've made a pretty handsome living working as a probate lender for 25 years and played both side of the game. This issue didn't come up until the first time in 2009 by a probate attorney pulling it on us on a Vallejo property. Tried to carve out $40K off top of a loan. Abusive, angry man. 

I lead the PBT industry to charge our docs to reflects this exposure but conventional lenders have still not awakened.

Probate attorneys generally don't want to take in cases unless they see that they're going to get paid. Lenders generally won't talk to family until Probate Letters appointing available.   So for a while, the affirmative Order was the only way this was possible. Since judges won't sign those Orders now (here) there's not much opportunity for PBT short sales.

Originally posted by @Jerry W.:

My reading of the statute is that @Rick H. would be right though that the probate court could not order a short sale over the objection of the mortgage holder.  I have never heard of a probate court having the power of a bankruptcy trustee to stop a foreclosure.  Good job Richard.

I'm being technical because the original post said that it's CA statute that the lender in a short sale has to pay executor and attorney fees.  The court can't order the short sale, so any fees paid to the attorney and executor that reduce the lender's proceeds are an agreement by the lender to facilitate the sale. An agreement by a lender to reduce their proceeds in order to comply with priority regarding the fees is not law.

In CA, the statutory fees paid to execs and attorneys aren't based on the sale value or FMV of the property, but rather the value of the entire estate at date of death, plus extraordinary fees, plus expenses. I've never seen fees pro-rated for a particular asset. In an estate that will see no cash except the short sale proceeds, is the lender supposed to agree to accept a reduced payoff to accommodate the extraordinary fees and expenses as well? Additionally, exec/attorney fees are typically paid at the end of the probate and the amounts are included in the final order. I don't understand how the short sale and final court order would play out. Which is why I would like to read the CA case in question and see how and what fees were assessed and what the court order actually said regarding payment of fees. I believe the OP when he says the lender paid the fees. But I'd like to see it really went down.

Seeing a lot of over encumbered probate properties here in N CA and bypassing these.

Now that this topic has come up, I'm enjoying the responses and my thinking is taking me outside the box, again.

Mark (N-CA)

Sac/Placer counties

Mark,

Don't waste your time I've already tried this approach.  I was attempting to mitigate my losses on one in 2009 when the value had dropped by 40%...  not a happy ending :(  

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