Financing Buy-Outs: How to Close Probate the Easy Way

Probate specialist Lorrie Bryan has spent nearly twenty years arranging conventional institutional mortgages in California. She can be reached at (800) 779-2552.

Frequently, the best and most immediate buyer for an estate's real property is an heir, a family member, friend of the decedent, neighbor or a tenant. Before listing property with a broker consider exhausting these prospective buyers who may be ready and eager now but may be reluctant to speak up and make an offer. This article will address how financing can be used to expedite such a sale and save the estate many thousands of dollars.

The Situation

How many times has the following situation occurred in your practice:

You are administrating an estate consisting of a modest, single family home which has been listed with a Realtor. After many months pass by you learn that a family member has been dropping hints that they wish to purchase this property. The listing means that the broker has, in fact, produced a buyer and is entitled to a commission, even though the buyer existed prior to the listing. With some exasperation, you ask this captive buyer, "why didn't you say something before the estate listed the property and became obligated to pay a broker fee?" You know the answer, of course: "I didn't know that the estate was ready to sell."

Common reasons for not coming forward include a mistaken belief that a real estate broker need be involved, that an offer to purchase might embarrass other family members or that a large cash down payment is required to make the purchase. These reasons can be quickly eliminated if the attorney and estate rep. agree to let out the word early that the property is to be sold and that attractive financing terms are likely available.

Buyer's fall into two categories: 1) those who are heirs or possess some distributive share or interest in the estate, and 2) third parties or other individuals who don't have any distributive interest. Among the first category, heirs may be able to use their inheritance like a paper "down payment" to purchase property from the estate. Depending on the percentage of their share, it may be desirable to establish the gross value of this interest and document same for the lender. This may work to effect an equitable interest. Buyers who do not have an equitable interest may qualify for conventional or other loan programs which require as little as a 3 to 5% down payment. It may even be possible for another heir to assign their interest to a third party buyer.

More About Buyers

The buyer then should be pre-qualified like any other borrower based on credit, income and the property to be purchased. The larger the share value, the better the chances for qualifying and obtaining a loan. A buyer using this method must be in a stronger financial position if their share is anything less than a third of the estate, however they could be qualified almost entirely on equity and have, for example, only SSI or AFDC income with a one third share or more and still qualify for attractive terms.

It is essential that the buyer work with a knowledgeable lender experienced with this type of transaction. My experience is that about a quarter of my borrowers started working with another lender who never, ever got the client the promised loan. While I take no delight in this fact, much wasted time could have been avoided had they only done their homework seeking the right lender.