Deceased question

[Mark Gallagher]

My real estate mentor was diagnosed with a form of Leukemia in 2012. He passed away on 9/11 at the age of 60. He had approximately 30 units in 2010. Slowly he fell behind on payments, and eventually stopped paying all together as his health deteriorated. Some properties have already been taken back by the lender. At this point, there are 4 buildings I believe still in his personal name with his wife (which I can easily verify). The majority of the properties are worth less than what's owned. 

What's the next step? Do these properties go into his estate? And then the estate lets them get taken back and/or the estate attorney calls to negotiate a DIL? 

Most of them are underwater due to 2nd mortgages (obtained to get more units). Can the estate negotiate the 2nd to get removed somehow?

I'd like to try and salvage whatever is possible for the kids, and I'm going to be helping the wife try to clean this up as soon as possible for her sanity. Thankfully I don't deal with these situations often, so I'm looking to gain some knowledge so I can speak with intelligence about it. 

Any help is greatly appreciated. 

[Rick H.]

It's not accurate to say what will happen since, as you've described, no probate has been opened. 

Unless someone steps in to do so, the filing of probate is not automatic. Nor, is it an assured consequence of the death of an owner of real property. Also, it is quite possible that the manner of how title was/is held could altogether eliminate the need for probate. 

That being said, here are the key issues: 

1) No equity means it's unlikely that cash proceeds would be generated to the benefit of estate heirs or  beneficiaries.

2) If spouse has signed for mortgage loans too, determine if there is any risk of recourse to surviving spouse should default occur and subsequent foreclosure create a shortage. Each state or commonwealth has it's own laws concerning recourse versus non-recourse.

3) Since the estate is illiquid (and I am the guy that wrote the book on that topic) I suggest you discuss the ramifications of preserving any rental cashflow with your mentors's widow and her attorney. Given nature loans for rental properties and the high possibility of Assignment of Rent clauses in both the note and the security instrument. 

I'm not suggesting how she should treat the rental income however, she should know the consequences of redirecting funds intended to pay debt.

Sorry that you've lost a mentor. I have been very fortunate to have had some incredible mentors in my life who've helped me build (and keep) several fortunes. Your primary job, IMHO, is to find a way to add to your friend's wife's life.