Selling a home is, in itself, a complex process. When you do it within the probate process, there are additional layers of complexity that one must be aware of.
If it is determined that the sale of a home or any real property that is part of an estate’s probate assets is necessary, the responsibility for its proper execution lies with the personal representative.
The personal representative is legally obligated to act with ordinary care and diligence in administering the estate, and nowhere is this more true than when it comes to real estate sales. In brief, this means maximizing the value of the property for the benefit of the heirs and estate creditors.
The formal, court-supervised process of selling real property is governed by Probate Code §§ 10300–10316. Essentially, the process is similar to a public auction but with built-in guidelines to safeguard the estate.
Below we take a look at some of the salient points to a probate house sale process that sellers and buyers should know.
Valuation, the Probate Referee, and the 90% Rule
Before a sale can take place, the value of the property must first be established. This is done by a court-appointed Probate Referee, whose role is to provide an independent, objective valuation of the real estate property.
It is the appraisal by the Probate Referee that sets the baseline for the entire sale transaction.
Once the Probate Referee has provided a valuation for the property, California law imposes a strict threshold for the sale. Probate Code §10309 require that no sale of real property shall be confirmed unless the sum offered is at least 90% of its appraised value.
So if, for example, the Probate Referee appraises real property at $500,000, the minimum acceptable sale is for a price of $450,000 and above. Otherwise, the court will not approve not confirm the sale.
It is the responsibility of the personal representative to make sure that the property does not sell for less than 90% of its appraised value, which reinforces their duty to safeguard and protect the estate with ordinary care and diligence.
Notice of Sale
Another statutory requirement is for the personal representative to publish a Notice of Sale in a newspaper of general circulation in the county where the property is located.
This is not optional. It is a statutory requirement that must not be skipped.
For instance, if the property was appraised at a value of $500,000, and the personal representative immediately receives an offer to purchase at $450,000 – while it may seem that the personal representative is following the legal requirements by not accepting any bid less than 90% of its appraised value, if he skips the notice requirement and accepts the offer, he is opening himself up to potential liability right there.
Why? Just because he receives an offer of 90% of the property’s value does not mean he skips all the other mandatory requirements, including that of notice. A notice could potentially bring in a buyer that makes a higher offer, potentially even higher than the property’s appraised value. By immediately accepting the lowest possible offer for the sake of speed, the personal representative is effectively costing the estate the difference in the potential sale price.
At any rate, skipping the notice of sale requirement invalidates the sale, and the personal representative may become liable for any costs incurred.
The Petition for Court Confirmation
Once the highest offer has been received and all statutory requirements are met, the personal representative must seek court approval for the sale.
This is done through a Report of Sale and Petition for Order Confirming Sale of Real Property.
This is a petition for the court to review the entire process to ensure that all the legal requirements have been met, that the price is fair, and that the sale is necessary. The court then sets a date for a hearing and what transpires next is akin to what may be considered a “probate auction.”
The Overbid Hearing
This hearing is called an “overbid” hearing because parties will be asked by the court to overbid the original bid price. This is set out in Probate Code §10311
Initially, the judge announces the accepted bid and then asks if anyone present in the courtroom wishes to overbid. Any valid overbid must exceed the original bid by 10% on the first $10,000 and 5% more on the excess of $10,000 to be acceptable.
To illustrate:
- Property is valued at $500,000
- Accepted offer is $460,000
- 10% of the first $10,000 is $1,000
- 5% of the remaining balance is $22,500
So the minimum acceptable overbid during an Overbid Hearing is at least $483,500.
The court will continue accepting higher bids until it confirms the sale to the highest bidder. This confirms the purpose of the sale of estate property, which is to maximize the value for the benefit of the estate.
The Final Order and Closing the Sale
Once the court is satisfied that all legal and statutory requirements have been complied with, that the sale is necessary, and the highest bid is fair and acceptable, the judge will sign the Order Confirming the Sale of Real Property.
This order is the primary legal instrument that authorized the transfer of title to the buyer. The order will be recorded in the county recorder’s office, in addition to the deed transferring the title to the buyer. The purchase price is paid into the estate’s accounts, and the transaction is closed.
***
If you are a personal representative and are preparing to sell real property, we highly recommend that you consult with a qualified probate attorney. We can help you assess whether the sale is necessary, and if so, guide you through the process while minimizing your risk.