I wanted to avail this post to provide an overview of the often overlooked but lucrative niche of probate investing. Literally TRILLIONS of dollars will be transferred from one generation to the next. Enter an aging baby boomer population and this fact of life will only balloon in the coming years.
Probate is the legal process to obtain the legal authority to act on behalf of the estate of a person who has passed (Decendent). The estate is distributed in accordance with:
1) The will of the deceased.
2) When a will is not present, the laws of intestate succession are applied. These laws parcel out property to the deceased person's closest relatives.
Who's the decision maker?
The descendent usually spells out who they wish to be in charge of their estate. Yet absent a will, the court will assign a Personal Representative (PR), more commonly known as the executor, who is tasked with the fiduciary duty of divvying up the estate to pay creditors and distribute the remaining proceeds to the heirs. While anyone can petition the court to fill the role of a Personal Representative, most states prefer the surviving spouse or registered domestic partner as the first choice, followed by adult children or other blood relatives.
As a real estate investor, the main point to grasp from 40,000 feet is that the PR has been awarded the authority to sell the house. Your job is to contract it and buy it, or assign to another cash buyer. This is the crux of investing in probates.
Probates are the low-hanging fruit because the PR often has a heightened sense of urgency to sell the real property in the estate, for a host of reasons:
- There are taxes and other estate-related expenses that need to be paid, such as ongoing mortgage payments, utility bills and just about every other expense that is typical with an ongoing household.
- The heirs must pay the mortgage out of their personal finances, and this creates an urgency to sell the property as soon as possible.
- More often than not, the heirs do not want the house. They want the cash in the house. Heirs may live too far away from the property to play landlord or travel on a regular basis to maintain the property. Better to cash out and move on to build another chapter in their lives, than to be bogged down with the property.
- The PR may get in the middle of unfortunate heir in-fighting where heirs have disagreements as to their equitable share. This normally brings out the worst of people, and the PR has an increased need to liquidate the estate to end the fighting.
Investors that are able to make an early connection to build empathy and rapport with the PR and explain the benefits of working together will undoubtedly be successful.
The length of the probate process varies on myriad factors such as the complexity of the estate and intent of the parties – every case is different. Sometimes these deals seem to fall in your lap, as if the PR was waiting for your call. If only it was that easy in every case.
One phenomena we see not uncommonly is that a living spouse remains in the house and may not be motivated to sell RIGHT NOW. A few months later, when bills are accumulating and they want to build a new life, maybe get closer to the kids, the timing is better to sell the house and move on.
Since everyone's timing is different in terms of when they want to sell the real property attached to the estate, we highly recommend a concerted, sustained “drip” campaign over time to keep your willingness to help settle the estate top of mind.
Generally, while the PR has been awarded the authority to sell the house to investors like you, some states may require the PR to seek the Court's permission to sell the real property in what's called a supervised probate process. It is prudent to check the laws and procedures unique to your county and state.
In future posts, I will delve more into the nuts and bolts of probate investing and bounce some other ideas around as to how you can capture your share of this niche market. Till next time, A-B-C… Always Be Closing!