Buying From an Estate Is Just Like Every Other Home Sale. Except When It’s Not. Here’s What You Should Worry About.
(Subtitle: Buyers, you CAN save money by buying from an estate, provided you do your due dilligence.)
Buying from an estate has legal and practical implications that could change the way you approach the transaction. And, in the right instances, buying from an estate can save you money. Here’s what you need to know.
What’s an Estate?
You know the saying, “might as well enjoy it now, because you can’t take it with you”? All that stuff you can’t take with you, that’s your estate. When you pass away, all your existing property, assets, and debts become your estate. In other words, a person’s estate is the amalgamation of everything they own, tangible and intangible, at the time of their death. It’s kind of like a giant Frankenstein’s monster made up of houses, cars, cash, etc. And that monster is tasked with the sole purpose of dividing itself off and distributing its parts to the appropriate people.
Might as well enjoy it now, because you can’t take it with you.
The process of dispensing with the estate is called probate. Once all the pieces of the estate are gone, sold, donated, what-have-you, and probate is closed, the estate ceases to exist. Dust to the wind. Morbid, I know, but that the harsh reality of property ownership. It all has to go somewhere when we die. But how do we know where it goes, and who gets what?
Who Controls an Estate?
Estates are run by executors, sometimes called personal representatives or administrators, who act as controllers and operators of the estate. They’re the brains in the monster, trying to figure out how to divide and distribute the estate’s constituent parts. Usually, the executor is guided by a will, left behind by the decedent. Other times, state and local laws are their only guides. In any event, executors don’t have carte blanche to do as they see fit with the estate. Their primary goal is to distribute and sell off the pieces of the estate as quickly and efficiently as possible.
What & Who Are Heirs?
They get the dead person’s stuff.
Heirs, devisees, beneficiaries, etc, are the people legally entitled to receive the benefits of the estate. They get the dead person’s stuff. In some cases, that means they get the money that comes from the sale of that stuff.
Heirs often have some say in how the executor distributes the items contained in the estate. This can have a huge impact on how you approach buying a house from an estate. We’ll dig into that more later.
What Does Any of This Have to Do with Real Estate?
Glad you asked! Many estates include real property (land and houses, aka the thing you, hopeful buyer, want). In most cases, a house is an estate’s largest asset, and figuring out what to do with it with it is the single most important part of the estate/probate process.
What Happens to Your House When You Die?
Remember before when I said that an estate can include debts? Well, if a person died with more debt than cash, the estate is responsible for paying off those debts using the assets of the estate. Typically, this means an estate sale–a sort of macabre yard sale–will be held to sell off the deceased’s personal possessions. If the estate sale doesn’t cover all the debts, and the estate owns real property, well, that has to be sold now too.
There are other reasons why an estate might sell real property. Oftentimes, a person may state in their will that they leave their house to their children. If there are two or more children, and not everyone agrees to co-own the house or to give it to just one lucky sibling, then the house is likely going to be sold and the proceeds distributed equally among the heirs.
The distinction as to why the property is being sold could matter to you, home buyer, when considering buying from an estate. So, make sure your agent does the necessary background research to figure out just what the situation is before you start slinging offers.
How Is Buying from an Estate Different than Buying from a Normal Seller?
In many ways, buying a house from an estate is exactly the same as buying from any other seller. You use the same forms, pay the same money, do the same inspections, etc. But there can be crucial differences when it comes to how you do your due diligence investigating the property and how you negotiate the sale.
What to Watch Out for When Buying From an Estate
Make sure the person you’re buying from has actual authority to sell the house.
When buying from a living seller, we rarely question whether the seller has the right to sell the house. Their name is on the title; they’re the ones living there; there isn’t someone else screaming at you, chasing you out of the house when you do your showing. When dealing with an estate, however, you want to make sure that the person signing the documents actually has the power to authorize the sale. Here’s how you figure that out.
Ask to review the “Letters Testamentary”. In Washington state, an estate’s personal representative (aka executor/administrator) is appointed by a judge. When that person or persons are appointed, the court issues documents called “letters testamentary”. Think of these as a license to administer and distribute the assets of the estate. If you have any concerns about whether the person you’re dealing with has actual authority to sell a house to you, ask to see their letters testamentary. Assuming the sellers aren’t mustache-twirling villains with world class counterfeiting skills, the documents they provide can help put your mind at ease.
Special Situations to Watch Out For: Full Authority
In some cases, an executor has only limited authority to sell an estate’s property. The court should make this distinction in the letters testamentary, but it doesn’t hurt to have your agent ask the seller or seller’s agent to confirm they have full authority to sell.
Special Situations to Watch Out For: Multiple Executors
Similar to the case of limited authority, you should be able to determine whether an estate has multiple executors via court records and the letters testamentary. If there are multiple executors, odds are all of them have to sign off on the sale of the house before it can be official. Again, your real estate agent should look out for your best interests and determine whether there are multiple executors and make sure they all sign the necessary documents for you to buy your house from the estate.
Special Situations to Watch Out For: Sales for Less than Market Value
Let’s say you’re lucky enough to buy a house from an estate for substantially less than market value. Great! But, hold on… you may just have to wait for a court to sign off on the sale before the transaction can go forward. This will almost never be the case when buying a house off the open market (if the house is on the MLS). If you’re buying a property off-market, however, you may run into this situation.
How to Save Money When Buying from an Estate
When I see a home being sold by an estate, my head goes in one of two directions. Either I get excited, because I smell a deal in the air, or I get nervous, because I know my client is in in for a difficult negotiation. This dichotomy comes from the fact that there are, broadly speaking, two kinds of estate. The easy kind. And the hard kind.
The Easy Kind of Estate
In short: these estates are run by one executor (or multiple who are all on the same page) and that executor has one goal: getting probate over and done with as quickly as possible. Figuring out whether an estate is the easy kind is more art than science. Broadly speaking, if the home appears to be listed for less than full market value and doesn’t have a review date, it could be an easy estate. If I get to the house quick enough and write an offer day one, my clients might just get a sweet deal. Similarly, if I see a house is being listed by an estate following a prior cancelled or expired listing, and the price has dropped significantly, you better believe I’m calling that listing agent to ask if the executor is ready to sell fast.
The Hard Kind of Estate
Overpriced. Long on market. Broken down and dilapidated. Estates often own the properties you see sitting on the market for months on end with little activity and a poor listing presentation. These estates are penny-pinchers. They don’t want to pay what it costs to get full value for the house, they just want to cash out. But, they’re stubborn. They don’t have a good agent giving them advice, or perhaps they just didn’t listen to their agent. They listed too high and are unwilling to negotiate. Often, there are multiple executors and quarrelsome heirs. Negotiations are difficult–but not impossible–and you might need to get creative to find the deal.
Inspection Contingencies When Buying From an Estate
Regardless whether an estate is the good kind or the bad kind, you might still be able to get a decent deal out of them through your inspection contingency.
Sellers are loathe to back out of a listing after going pending with an inspection contingency. If they do, everyone will assume the transaction failed due to some massive flaw with the house. When dealing with an estate, the buyer often has extra leverage during the inspection. Estates typically want to get a sale done with quickly and really, really hate going back on market after getting under contract. So, even if the estate’s listing stated it was an “as-is” sale, I like to at least try and throw an inspection contingency in my offers as an opportunity to protect my buyers and possibly drive down the cost once we know the full extent of the home’s flaws. And flaws are quite common with estate property, buyer beware.