Buying Probate Property

Excitement was high on a recent Sunday morning as 50 people gathered for a probate auction at a Silver Lake condominium.

In the corner of one bedroom, two men huddled on strategy. In the living room, a couple reviewed recent sale prices for other units in the building. Others milled on the balcony to admire a view stretching from downtown Los Angeles to the ocean.

At 11 a.m. sharp, auctioneer Don Kennedy, of Kennedy-Wilson Inc., real estate auctioneers of Santa Monica, ordered everyone into the living room for the sale.

The condo’s owner had died recently, and the Los Angeles county administrator’s office was handling the estate for relatives in a distant state. Kennedy-Wilson had been assigned to auction the unit.

Kennedy explained the terms of sale--no contingencies, court confirmation and the required cashier’s check for $5,000 and a personal check, to total 10% of the “bid-in” price.

“The property is sold ‘as is,’ ” Kennedy cautioned prospective buyers.

Bidding started at $100,000. A few minutes later, after frantic cross-bidding between two interested parties, the property was sold for $157,000 to Frank J. De Santis Jr., who lives in his own home two blocks away.

“I plan to rent the condo,” he said. “(A bid of) $160,000 was my ceiling. I know that another unit in this building recently sold for $160,000, but it doesn’t have the view this one does.”

De Santis’ wife, Penny, arrived 15 minutes after the sale was over. The papers were signed, and the auctioneers were off to their next sale, a house in South-Central Los Angeles. The condo was locked up.

“I can’t believe it’s all over,” Penny De Santis said. “I didn’t even get to see what it looked like inside.”

Welcome to the world of probate real estate, a pitfall-laden process that can provide a way for the wary home buyer or investor to acquire real estate at below-market price from the estate of a deceased property owner.

But you have to do your homework to come out ahead. If you don’t research the neighborhood and set a limit on what you are willing to spend, you can end up paying more than the property is worth, probate real estate experts caution.

In the worst scenario, a buyer who cannot come up with financing after successfully bidding in a property may lose all or part of the 10% down payment.

But savvy probate purchasers can buy well below market price.

Lanny and Terry Tron recently bought their northeast Pasadena dream house for about $40,000 below the original asking price at a court confirmation hearing in Los Angeles Superior Court.

“We have been looking from North Hollywood to West Covina,” said Terry Tron, a third-year law student at USC.

“We really wanted to live in Pasadena but couldn’t find a house we could afford. When our agent, George Keshishian of Century 21 Golden, called about this house, I thought it might be too old.” At the realtor’s urging, she looked at the 1925 house, and fell in love with it.

The house has three bedrooms, a dining room, central air-conditioning, a new roof and it has been rewired. The front yard is enclosed with a white picket fence. The garden has fruit trees and rose bushes.

Terry Tron first saw the house on a Thursday. An offer had already been accepted for the house and the court confirmation hearing was scheduled the following Monday morning.

Her husband, Lanny, a downtown Los Angeles attorney, looked at the house on Friday and was also delighted with it. The Trons knew they had to make a quick decision if they wanted to “overbid” the first offer at the confirmation hearing.

There wasn’t enough time to schedule an inspection, so Saturday morning, a contractor friend, unable to come himself, sent his wife, who is knowledgeable about construction, to check out the property.

Then the Trons rushed to the bank for a cashier’s check to cover the deposit and what they hoped would be their first, and only, overbid.

After a short hearing Monday morning, 3 1/2 days after they had first seen the house, it was theirs. Their overbid of $12,500 over the offer of $240,000 was the only one submitted and it was accepted by the court.

“We’re definitely the happy ending story,” Lanny Tron said. “We got an immaculate house at a good price. The estate is happy too, because they instantly got $12,500 more than the first offer.”

Every year, thousands of pieces of real estate are sold through probate in Southern California.

In Los Angeles County alone, while confirmation hearing statistics are not kept by the court, it is estimated that in 1989, about 2,000 confirmations were heard in downtown Department 5 and the 11 outlying districts of the Superior Court.

Properties are sold during probate when the executor or administrator of the estate directs a sale to generate money to pay debts or cash to distribute to heirs.

If there are no known heirs, no resident heirs or in cases where there is a will contest, the public administrator’s office is appointed by the court to oversee the estate.

Probate property--houses, apartments, unimproved land, condos and commercial buildings--is sold in different ways.

“It may be listed with a broker,” said Susan J. Cooley, a partner with the Encino law firm of Cappadona and Oldman, “who is required by law to expose it to the market through the multiple listing service, open houses and advertising in newspapers to generate the highest offer.” Most probate property is sold in this manner.

However, some probate property may be sold at public auction. This method is used for real estate handled by the public administrator and for other properties that need greater exposure to generate a higher price for the estate.

In both cases, the successful bidder must generally go to court for confirmation of the sale.

If the executor has independent powers of administration, which include power to sell the assets of the estate, the property may be sold without court confirmation if beneficiaries do not object.

Most properties, however, are listed with a real estate broker selected by the administrator of the estate in consultation with his or her attorney. The asking price is determined after an appraisal by a probate referee.

While showing the house, Cooley said, agents must inform prospective buyers that the house is being sold through probate and will be sold “as is.”

“The only exception to the ‘as is’ sale is if the executor knows that toxic pollution is present. This fact must be disclosed and the waste cleaned up prior to the sale,” she said.

“In probate you don’t have the luxury of someone buying a regular house,” says Laura Asher, an agent with John Geary & Co. Ltd. East in Studio City.

“In a regular sale, if there’s a major problem such as a bad roof or a foundation problem, you can get out of the sale or request that the seller fix it. In probate, once you’ve made a successful bid, that’s it.”

When the agent gets an offer, it is presented to the estate accompanied by a 10% down payment. If the offer is accepted, the attorney drafts a petition for confirmation of sale and files it with the court for a hearing date, usually about 30 days later. The amount of the offer and the hearing date are published in legal or general circulation newspapers and are posted in the county courthouse where the hearing will take place.

In the weeks between acceptance of the offer and the hearing date, the broker must continue to show the property to anyone interested.

At the confirmation hearing, other interested buyers can come in with overbids, which can be a drawback to probate buying.

“I’ve seen many people leave the court in tears when they’ve lost out in an overbidding situation,” said Cooley, who bought her own house at probate two years ago.

For example, Linda and Sam Pillsbury placed an accepted bid on a house in Glassell Park in 1987.

“I thought the house was ours,” said Linda Pillsbury, publisher of “Child Care Los Angeles.” “I was planning where the furniture would go. Then, when we got to court, we were overbid. We were not prepared to make a counteroffer, so we lost the house.

“For a while we were devastated. There’s a psychological drain in having your money tied up for a month. When we finally bought in Eagle Rock, we didn’t buy at probate.”

But there’s a happy winner for every disappointed loser in the overbid process.

David and Jennie Smith-Moore bought their Atwater house at a confirmation hearing in the Glendale court, overbidding the original accepted offer.

They had already been approved for a loan to buy another house in the Adams Hill district of Glendale. When that sale fell through, they decided to make a bid on the Atwater house, which they had seen earlier and liked.

Like the Trons, they had to rush to the bank for a cashier’s check for the deposit and overbid. They had earlier visited a confirmation hearing to familiarize themselves with the procedure. When they made their overbid, the first buyer backed out of the bidding, and the house was theirs.

At the confirmation hearing the judge or commissioner asks the attorney representing the estate if there are any overbids.

“Normally, before the hearing, the broker representing the overbidder will contact the attorney for the estate to ask what his client will need to bring to the hearing,” said Christina M. Stone, a La Habra attorney who often takes cases to confirmation hearings in Orange County.

“When I’m representing an estate and there’s an overbid, I require documentation that the overbidder can swing the sale,” she said. “This may be hard to do. It can be in the form of a financial statement or open letter of credit from a bank.”

The amount of the first overbid is determined by the California probate code. It equals 10% of the first $10,000, plus 5% of the balance of the accepted price. This amount is added to the original accepted offer.

For example, the first overbid for the Tron’s house was $252,500, or $12,500 more than the original offer of $240,000.

After the first overbid, the judge sets increments for subsequent bids. In this case, the second increment was set at $4,500 and subsequent increments at $3,000. But there were no further overbids, and the Trons got the house for $252,500.

In probate sales in Los Angeles County the court awards a 5% commission, which is split by the listing and selling agents. In other counties, the brokers split a 6% commission.

The agent representing the unsuccessful offer receives no commission, even though their client’s offer was initially accepted prior to confirmation.

For that reason, said Frans Simson,) an agent with Fred Sands/Los Feliz, “many brokers don’t want to show probate properties.

“Even though you do a lot of work showing the property and bring the court an accepted offer, if an overbidder buys the property, you don’t get a commission.”

In a probate sale, the interests of the buyer are not the major concern of the court.

“Buyers at probate should be aware that the responsibility of the court is to see that the estate takes the highest and best bid,” cautioned Ann E. Stodden, probate commissioner and supervising probate attorney for the Los Angeles County Superior Court.

Usually, probate sales require all cash, and only occasionally will the court allow an estate to assume a first mortgage. If the purchaser fails to obtain financing, the property then must go back through the process to find a new buyer, possibly delaying closing the estate.

“A person should know how much financing he or she can qualify for before going to court,” Cooley advises.

Because many probate houses are fixers, the buyer should know the approximate price for refurbishing and add this to the price he’s willing to pay for the property, according to Bob Gilbert, a broker with Clor/Winkleman Realty in Fullerton.

“I don’t believe you can get much for under market value at probate. The price of the property is reflected in the condition of the house,” Gilbert said. “There may be a lot of repair work. If the buyer can do some of the work, he or she might get a good buy.”

Charles Flans of Charles Flans & Associates, real estate auctioneers in Encino, concurs.

“If you’re handy and can fix the house yourself, you can get a good deal because many probate houses are in bad condition. You might not be able to get financing until you fix up the property. In that case, you’ll have to have the cash up front. A buyer must do his or her homework in researching comparable prices in a neighborhood to come out ahead,” Flans said.

In spite of its drawbacks, successful purchasers believe that probate sales are an attractive way to acquire properties.

“I think probate is an easy way to buy real estate,” said Pat Walters, vice president of financial services domestic marketing for Columbia Pictures, who recently bought a Van Nuys townhouse with a partner as an investment.

Walters and agent Laura Asher who represented both the estate and the purchasers attended court. It was their first probate sale.

“We were all a little nervous,” Walters says. “We were the third case to be confirmed. We saw a bidding war on the first two properties. We hadn’t planned to overbid. When our property came up, there weren’t any overbids. It was all over in about a minute.”

TIPS ON BUYING AT PROBATE

* To find probate properties, look through the classified ads in local and metropolitan newspapers. Auctions held by Charles Flans & Associates are advertised in the Los Angeles Times Business section on Sundays. Legal newspapers such as the Daily Commerce and Metropolitan News Enterprise in Los Angeles and the Orange County Reporter in Orange County carry notices of properties that are being sold at probate and hearing dates.

* Dates for confirmation hearings are posted in local courthouses at least 15 days prior to the actual hearing.

* Ask to have your name placed on the probate list sent out by the Los Angeles County public administrator’s office. Kennedy Wilson Auctioneers also keeps a mailing list.

* When you find a property that interests you, inspect it thoroughly. You may want to hire a professional contractor or property inspector to go over the property to find major defects. Remember, these properties are sold “as is.”

* Determine how much it will cost you to repair and refurbish the property.

* Research comparable prices in the neighborhood to determine how much you should offer.

* Check with lenders to see how much they will loan you on the property prior to making an offer.

* If you decide to submit an offer, select a reasonable amount to discourage overbidders at the confirmation hearing. “Come in with your best offer the first time,” advises Joan O’Rourke of Fred Hawkins Realty in Arcadia. Be prepared to put 10% down.

* Visit a confirmation hearing to become familiar with the process.

* Take additional cash or funds in the form of a cashier’s check to court in case you have to make overbids.

* Decide whether you want to represent yourself or whether you will be represented by your agent.

*If you are an overbidder on the property, bring a cashier’s check to cover the first overbid and subsequent overbids set by the court. You may also want to bring a letter of credit from your bank to prove your credit if asked.

* Realtor O’Rourke also tells her client not to fall in love with the property. Without emotional attachment, it is easier to drop out if the bidding goes too high.