Alternative Solutions for Workout, Buyouts and Probate Estates

Veteran mortgage banker and probate real estate specialist Rick Harmon shares with you perhaps the easiest and safest method for selling probate estate, conservator and trust property most anywhere in California.

Difficult heirs. A depressed real estate market. These are just a few of the hurdles facing probate attorneys these days. Even in the best of times, the resolution of a case can take up to a year or more.

Tradition has called for probate attorneys to sell estate-owned real property when the need to distribute the equity of the property occurs. The challenge has been the time required to secure a buyer, meet the buyer's conditions of sale, awaiting the buyer finding money and closing escrow. A frustrating and tedious process, at best.

Trying times require creative solutions. Increasingly, probate attorneys are embracing creative financing as a way to meet the demands of clients and opposition as well as their own needs, in a timely and more cost effecetive manner. They are able to put the equity of the real property to better and more immediate use through mortgage financing.

Most everyone is familiar with conventional "bank-type" financing. Borrowers qualify based on many different factors relating to credit history, job stability, income and consumer debt as well as modest equity and property requirements. Probably less than 60% of homeowners meet these rigid guidelines but those that do enjoy the most favorable interest rates and terms due to lenders' lower perceived risk.

Conventional financing can be useful where a borrower is financially strong, stable and credit-worthy and desires to either buy out another's interest or buy a property outright with a correspondingly small personal investment, i.e., down payment. Non-conforming lenders have emerged to fill part of the gap left for borrowers who can't qualify for "bank-type" loans but do pay most of their debts timely. Just as with conventional mortgages, non-conforming lenders do require borrowers to own property as an individual (no corporations, partnerships, trusts or estates). These lenders will, however, require a larger percentage of protective equity for their loans, averaging 20-40%, depending on the circumstances of the borrower.

Equity-based lenders are the real specialists of the industry as they arrange mortgage financing on what's leftover. By the very nature of financing, the equity lender understands up front that a given loan request which does not qualify for other programs will require a larger amount of protective equity. These loans are certainly more difficult to place and are typically sold to private investors and pension funds.

Equity lenders have the distinct advantage of being able to loan to borrowers who are unable to find financing because their circumstances does not fit conventional or non-conforming guidelines. The reason could easily be due to how title is held, (i.e., not as a person) or some aspect of the real property prevents it from fitting any other program. The true advantage here is that the equity lender has the flexiblity to make even the most difficult loan work, as long as the remaining equity is high. Equity lenders will typically not loan more than 50-65% of the value of a given property.

The practical applications of creative mortgage financing are almost without limit. There's hardly an area of law where some practical understanding of how to utilize lenders is not of significant value. Some of these applications include:

• Marital dissolutions; buy out ex-spouse's equity
• Partnership dissolutions;
• Remedy foreclosure
• Cash to meet short or long term obligations
• Debt consolidation
• Pay tax obligations
• Pay for legal expenses

Let's examine a strategy which will appeal to almost every attorney who deals with clients and wants to be compensated.

In the typical probate estate, what assets which remain are a home, some personal items and little cash. In our example, Mr. Greene, a widower, passes away testate (with a will) and leaves behind a modest home in Bixby Knolls valued by the court appointed probate referee at $300,000 as of date of death. In addition, Mr. Greene's estate contains some furniture of little cash value. It also has against it several claims for medical expenses and funeral costs totalling $10,000. In addition, a small mortgage exists with a balance of $15,000. There also remains the matter of statutory attorney fees (your bill) which must be paid at distribution.

Mr. Greene left two heirs, his son and daughter, who are to receive equal shares of the inheritance. While the son lives out of state, the daughter lives in the family home and wishes to remain there. She is also the personal representative and has elected to waive her fee in lieu of paying six months rent.

When further examined, the needs of this estate client appear to be that the estate rep., an heir, does not want to sell for nostalgic reasons. The brother however persuades her to list the property for sale with a local real estate company. After some six months of no offers we learn that the property has actually gone down in value because of the depressed market and lack of buyers who are attracted to the outdated interior design and the deferred maintenance problems. The listing agent confesses that in order to attract any buyer the property will have to be reduced to $250,000 and the estate should additionally budget some $10,000 in repair work prior to selling. ...Less his commission...less escrow, title and other closing costs.

• $300,000 Probate referee appraised value, at Date of death
• $10,000 less medical and funeral bills
• $15,000 less existing mortgage balance
• $7,150 your statutory probate legal fees
• $267,850 what the two heirs thought they would split

• $250,000 Current market value (unadjusted for defects)
• $10,000 less concessions to buyer for repairs
• $19,200 less 8% closing costs: broker/escrow/title etc.
• $10,000 less medical and funeral bills
• $15,000 less existing mortgage balance
• $6,150 your [basis reduced] statutory legal fees
• $189,650 What the two heirs would split if sold

Clearly, the two heirs would be in for a surprise if they elected to sell the property.

The alternative is that the estate could obtain a new mortgage qualified by the equity of the home. This would permit the daughter to remain in the home and avert the high costs associated with selling at this time.

• $300,000 Court probate referee basis remains unchanged
• $10,000 Medical and funeral bills
• $15,000 Old mortgage (to be paid off)
• $7,150 [Higher] Statutory fees based on court's value
• $4,850 Cost of new mortgage
• $ 37,000 Amount of new mortgage

By borrowing the necessary funds, this estate was able to avert selling a home filled with years of memories.

SELLING OR BORROWING AGAINST A TRUST DEED YOU OWN

An often forgotten method of generating cash is to sell or borrow against a trust deed note which the client owns. In selling a trust deed, the buyer (assignee) sells all or part of a note at a discount which gives the buyer an acceptable yield. A little known technique is to borrow against a trust deed rather than selling it (called hypothecation in the industry). This permits the beneficiary to avoid the cost of discounting.

THE HIGH COST OF DELAYS

No treatment of this topic would be complete without spell.ing out what the costs of case closure delays are. There are many factors about delays which you may have already considered, particularly from the standpoint of the sole practitioner. The cost to a client for an untimely resolution can be decreased value of real property due to a poor market, maintenance and other hidden costs as well.

The primary reason borrowing is attractive is because it allows for a low cost, almost immediate means of resolution. When selling real property there are a vast number of mostly uncontrollable factors which hamper the ability to locate a buyer and close in reasonable time.

If you don't consider financing as a viable alternative to selling you may be shortchanging both your client and your firm. The key in all opportunities is to encourage the client to keep an open mind and to remember that creative financing can be an attractive option to selling real property.