Trust, Probate and Court-Confirmed Property Sales — a more involved way of getting a home in San Francisco, especially if it’s a fixer
Eventually we may encounter a property that is being sold subject to a “trust sale,” a “probate sale,” or a purchase is otherwise, “subject to court confirmation.” What gives?
This isn’t a Law and Order episode (cue the music anyway?) but a property sale where a property owner’s estate planning was unclear, missing or is somehow being contested. In other words, these types of sales are ones where someone has died and the estate, a conservator, trustee or court, is supervising the sale process because there is no will, trust or heirs or the documents are unclear, contested or lacking.
Varying regulations, procedures and timelines will apply depending on how lacking the estate planning was with some probate/estate sales resembling normal sales (without much by way of seller-provided information being the biggest difference), while other times will require extensive involvement by a judge meaning hearings and opportunities for for bidding and competing for a property at a court-run auction.
If his honor allows, we’ll explore more below.
Backgrounder: Why a Probate Sale Instead of a Normal Sale?
Instead of the usual process where an owner is alive to sell their property, a probate sale is one where the owner isn’t around anymore to participate in the sale. When you see “probate sale” in San Francisco, it can mean a fairly ‘easy’ process that resembles most sales or it can mean one where a judge will oversee an auction where folks can bid against folks who are otherwise in contract to buy the property already. Just how involved a judge and how intense a sale can be depends on how well a property owner planned their affairs after they pass into the great mystery of the beyond.
Good: A Trust Sale — Nominal Court Involvement
Near Normal: A Trust Sale
There was as will and a trust document and none of the beneficiaries oppose the outcome
The fastest, most private and easiest method of handling an estate and of disposing of real property is if the property is held in trust. A ‘trust sale’ can be one with no court confirmation hearings so long as the trust documents cites a certain section of the Civil Code (the Independent Administrations of Estates Act). In these cases, a successor trustee is then given full authority to conduct a sale. Court supervision is bypassed. These sales pretty much track most ordinary private sales where bids or offers are independently solicited but disclosures are less complete as a trustee may have never even been to the Property being sold. Property sales under the IAEA do not have the same restrictions as a court confirmation sale and buyers may submit a contract with the usual contingencies and provisions as non-probate sales (see Cal. Prob. Code § 10503).
Some notes:
- Most like a regular sale so long as the property is in good enough condition
- Fewer disclosures but there could be some as sellers may not know much about property
- Decision-makers may decide on other factors apart from cash
- Possibility of having buyer contingencies in offer
- Normal financing usually available and a standard 3% deposit can be used
Some Context...
Decisions. Decisions.
Trust Sales: Who Decides Who Wins...
In trust-based sales, the decision-maker (and signer) may be just one trustee or executor deciding who to sell to. But in other cases a decision may require the consent from a number of named trustees. It may mean a lot of coordinating signatures across different time zones, generations among folks who may never had contact with the property or people with varying motivations. In any case, one offer will emerge as the winning one but these types of sales do allow for back-up offers too. Just another note: In cases where the trustees disagree with each other or in executor-decided where the designated heirs disagree with decisions made or refuse to participate, selling the property using the court confirmation hearing may be unavoidable. In other cases, where heirs agree, written consent documents may still be needed, so be prepared for delays to accommodate this scenario.
A Little More Complicated: A Court-Supervised Sale
A Different Normal: A Court-Supervised Sale with a Conservator, Administrator or Administratix
There was a defect in the estate planning document but its essentially covered
If the deceased designates what will go where and to whom in a will but ends up failing to state that the estate will be administered according to a trust and the standards contained in the IAEA, the disposition of the estate will need to go through certain court proceedings before a piece of real property can be sold. It may not be the full blown-out court-sponsored auction circus we discuss below, however.
Assuming there isn’t anything awry or aggrieved folks cut of the will, an executor over the estate will be designated and have the authority to act on the estate’s behalf and decide if a property should and, provided they’re doing so freely and reasonably, can pick from offers presented.
Getting the executor the proper authorization to do so, however, will still take several months to complete in California. The appointed personal representative will act as the estate’s executor, executrix, or administrator/administratix and is generally responsible for wrapping up the estate, paying any remaining debts and distributing the remaining assets to those inheriting them. Executor/trustee conduct is subject to certain minimum standards however as there are various fiduciary duties to execute as well. A fiduciary may get compensated a certain percentage of the sale proceeds for their time according to the applicable rules and regulations.
Some notes:
- The waiting process before property sale can take place will be several months and delay close of escrow if marketed too early
- Boilerplate disclosures may be available but specific ones about the given property may be sparse
- Decision-maker may consider other factors than price but obligations to the beneficiaries which may influence whatever decision an executor/administrator makes
- There may be people who oppose and/or contest the will, which may mean more court involvement
- What’s worse if there’s a lot debt tied to an estate.
- Financing is usually available so long property is in decent shape (in appraiser speak: C4 or better in most cases with some exceptions made with Fannie Mae loans up to C5).
- Escrow deposit is 3% and closing’s duration is flexible
- Buyers may have to pay San Francisco's Energy and Water Conservation Ordinance compliance and/or transfer tax (usually a seller cost in the county)
Drama Anyone? The Most Court Involvement
To the Highest Bidder: With a Confirmation/Overbid Hearing (The Philosophy Behind It)
There are times where there are no estate planning documents or the documents that exist leave an estate to someone who’s already dead or there’s no one else left to inherit the estate. Or maybe the documents are too general or unclear to be valid, there’s been a dispute that isn’t easily solved. There is some insufficiency whereby the market is asked to do what the market does.
First off — tsk, tsk to those who didn’t plan ahead of time. They could have saved everyone this hassle, right? But moving on...
It's these times when a county’s Superior Court Probate division will be charged with disposing of the estate’s assets and/or resolving conflicts from the lack of documentation or clarity.
Usually, this means the court is tasked with selling any real property the estate holds. Probate judges will use a combination of hiring real estate agents for the preparation, presentation and marketing of a property in conjunction with a mandated court confirmation (or overbid) hearing (read: auction) to get a property sold.
Public sales like these are supposed to guarantee some modicum of fairness because the process is slow but open to anyone who can show up to the court date.
The court confirmation sale process adds unnecessary delay and often favors cash buyers because they have money that’s ready to go, but it is possible to use financing too (unless the property condition is so bad that normal lenders won’t touch it).
Practically, though, the court confirmation hearing process means that buyers can have two bites at the apple if they fail to get the property through the agent-portion stage of the sale at the hearing that is designed to ’confirm‘ an accepted purchase offer contract otherwise — hence the term court ‘confirmation.‘
But, in confirming the contract price for a property, hearing is akin to a public auction that will invite concurrent and competitive bidding.
The winning party at court hearing must have cashiers’ check down payment (if not original winning buyer) and has 30 days to close transaction (whereupon they must complete the loan approval process if paying by mortgage).
Some notes:
- 10% cashier's check needed as a deposit
- Few, if any disclosures available
- Depending on how dilapidated a property is, home financing may not be available, thus requiring a cash purchase
- New owners may have to deal with tenants
- New owners may have to pay transfer tax and SF Energy and Water costs
- Not for the faint of heart
The Court Confirmation Process
Here’s how these sales work:
Once the heirs or next of kin figure out that So-and-So didn’t have the proper paperwork in place for them to sell the property without court’s involvement, they should reach out to an attorney to help them handle the process. The hope is that this will shunt the process off to the conservatorship/administrator tract with less court involvement. But, if there isn’t lawyer involved or there’s a dispute between potential recipients of the estate, a court may have to appoint a listing agent, who will set a fair list price for the property (there may be an appraisal involved at one point).
In all cases, the listing agent will market the property after clearing it out (if possible) and will usually set an offer date to review offers.
Remember probate sales are “as is,” and there are little, if any, disclosures. There are times where the buyer will have to pay the transfer tax instead of the seller and ensure that San Francisco’s energy and water conservation ordinance items are taken care of (or at least accounted for if the property is a fixer).
Note: In most cases, these types of properties are run-down or have a fair amount of deferred maintenance as the past owner lost the ability to remain engaged with the property. You’ll see terms like “fixer,” “diamond in the rough,” or, in very bad cases, “contractor’s special,” “cash-deal needed.”
Therefore, if you’re interested in bidding you should conduct any inspections, walk the property with a contractor and research its potential in context with planning and zoning issues before making an offer because the only contingency that a court may allow or accommodate is a financing one (but that’s doubtful). In other words, no one will entertain any requests for repairs or inspection contingencies.
Back to the process:
Once the offer date is here and the winning bid is picked the listing agent will ask the court to set a hearing to ‘confirm’ the sale, which usually takes place 30 days after contract ratification. Most courts will require the winning bid to present a 10 percent deposit in the form of cashier’s cheque upon acceptance. Once the date is set, the listing agent is required to tell any other interested bidders about this hearing date and post the date on the MLS. During this time, the winning buyers at this stage should finalize their financing and prepare for potential competition at the hearing.
Shortly before the confirmation hearing the listing agent will inform everyone who bid what the first minimum overbid amount will be, which is +10% to the then-current ‘winning’ price plus $500 more.
At the confirmation hearing, there is an opportunity for other unsuccessful bidders to bid and outbid the then–current leading offer; if you’re the winner going into the hearing, be prepared to defend your offer with reserve cashier’s cheques. Bidding at the hearing is open to the public but each bid must be legitimate and backed up by cashier’s cheque (or cheques).
The judge will then set higher and higher bid intervals at their discretion if there’s competition; a typical interval amount is $5,000 or even $10,000. This means someone else you’ve never heard of before may bid over the contract price and steal the property away from you effectively. (Cal. Prob. Code § 10313). Bidding increments will be announced and must be backed by casher’s cheques at each interval — so, no Price is Right rules where +$1 beats people out. Therefore if you won at the initial bid stage bring a cheque to beat out an overbid amount plus 10% of the number of $5,000 increments you’re willing to pay for the property.
A Variation for the True Fixers
There are the above sale methods but the issue being that a property is in such rough shape, purchases must be paid for all-cash. Usually the case with major fixers that are unsafe to access or fire-damaged structures.
For trust or conservator sales, you will need to present proof of funds with the offer. If you win a property at a court overbid/confirmation hearing you will need to have a cashiers’ check for the down payment but should also be prepared to show the cash assets you’ll use to complete the purchase.
Buyers Who Have Bought Through the Above Say...
Kevin and Jonathan are an incredible team! After searching for two years, they encouraged us to bid on a probate sale — a house we loved — but believed to be out of our reach. Their persistence, reliability and encouragement landed us our dream house to remodel. Having Kevin and Jonathan as guides through the SF real estate market is a true win. Their expertise and knowledge in navigating housing and neighborhood options, complex processes and paperwork is bar none.
— Katherine and Riyad, Buyers, Confirmation Hearing Winners, Bernal Heights
Buying a house is complicated, and there are numerous factors to consider and decisions to make. You both helped us understand all of these, and you made yourselves constantly available to answer our questions. You helped us craft an offer that the seller accepted over the others, including one that was all cash. We feel so lucky that we had you on our side. Without your help and guidance, none of this would have happened.
— Patch K., Trust Sale Buyer & Seller, Twin Peaks & SoMa
Like anything atypical please remember the above information may vary from your exact circumstances. It's best to contact us if you have questions. Be sure to consult any relevant professionals too!