Frequently the real estate that had been owned by a person now deceased is made available for sale through a procedure commonly known as a “probate sale.” When this happens a somewhat complex set of rules comes into play, especially, of course, in California.
The personal representative of the estate (also known as the executor or the administrator, depending on the circumstances) may seek purchasers directly or he may list the property for sale with a real estate broker. If the property is listed, the listing period may not exceed ninety days (California Probate Code # 10150(a)). Extensions of up to ninety days each may be granted if needed.
Prospective purchasers often find that things get a bit confusing when an offer is made. Generally, negotiations will be conducted as in an ordinary sale. That is, the offer may be presented to the executor, that person might then issue a counter-offer, there could then be a counter to that, etc. However, even when the executor and the purchaser have come to terms, the deal is still not final.
The estate’s acceptance is subject to confirmation by the court. The executor must petition the court for a hearing date for the purposes of confirming the sale. That is a public hearing, and notice of it is made public. The date set for the hearing will depend on the court calendar.
At the time of the hearing other interested parties may bid on the property as well. The Probate Code sets forth a formula for determining the minimum amount of the first overbid. The first overbid amount must be at least “…10 percent more on the first ten thousand dollars ($10,000) of the original bid and 5 percent more on the amount of the original bid in excess of ten thousand dollars ($10,000) …” [Probate Code #10311(a)(1)]
Suppose, for example, that an executor had accepted an offer of $300,000, and that you came to bid on the property at the confirmation hearing. You couldn’t open by bidding $301,000. According to the formula the first overbid would have to be at least $315,500. (10% of the first $10,000 = $1,000, 5% of $290,000 = $14,500).
After the minimum overbid has been made, there can, of course, be further bids. These are not subject to a formula, and the court may set the bid amounts at that time. For example, the judge can say that he will hear further overbids only in increments of $500.
If there is bidding, and the highest offer is on different terms than the originally accepted offer, the court will not confirm the highest offer unless its terms are acceptable to the estate’s representative. For example, the estate might have preferred and originally accepted an offer that involved credit such as carrying back a long-term mortgage. (It is a myth that probate sales must only be cash to the seller.) If an overbid offer were for cash, it would not have to be accepted. Similarly, if the accepted offer had been for cash and the overbid involved credit.
In general, the probate rules and procedures are designed to bring the best price to the estate. In that regard, the court is granted a great deal of discretion. Even with overbids, the court may disallow a sale, and order a new one, if it feels the price is not appropriate.
The code also directs the court to determine that the property received adequate exposure to the market. Listing brokers of probate sales need to be prepared to show that the property was marketed thoroughly.
There is a very complex set of rules for determining brokerage commissions in the event of an overbid situation, and it would not be beneficial to recite them here — especially because they can be set aside by the court. Brokers need to warily remember Probate Code #10161(a), “…whether or not the agent or broker has a contract with the personal representative, the fee, commission, or other compensation of an agent or broker…shall be the amount the court, in its discretion, determines to be reasonable…” [my emphasis]
It is often thought that probate sales represent the opportunity to find “a steal”. Given the procedures set forth for making such sales, that is highly unlikely.