Purchasing Property From a Decedent's Estate Frequently, the property of a decedent is sold rather than distributed to the heirs. There is sometimes a need to raise cash or pay taxes, or, more often, property will be sold so that the sales proceeds can be split among several heirs. In any event, estate sellers are often very motivated to sell, and motivated sellers can mean bargains to careful buyers.

There may be unique procedures that must be followed when an estate sells real property. These procedures depend on how the decedent's estate is being handled. There are three common alternatives:

1. The property is held in trust.

2. There is (or will be) a probate proceeding.

3. The estate is subject to the Independent Administration of Estates Act. Trust Property You can usually determine whether a property is held in trust by determining who the record owner is. If title is held by a trustee, the property is held in trust. For example, if title was vested in "John Smith and Jane Smith, Trustees of the Smith Family Trust," the property would be trust property.

On a person's death, trust property passes according to the terms of the trust and a probate proceeding is not required. If the decedent was named as the trustee, the successor trustee will be the person identified in the trust agreement as the successor (or appointed by the court if there is no named successor able to serve). The trust agreement is a private document and is not required to be filed in any public record either before or after a person's death. It may be difficult to ascertain who the successor trustee is.

A letter addressed to the property (assuming it is residential property) will usually be forwarded to the successor who is in the process of winding up the decedent's affairs. Although a trustee's power may be restricted by the trust agreement, a trustee will usually have the power to sell trust property as if the property was not held in trust. No court approval of the sale is required, although a trustee may seek court approval to protect against later claims by a beneficiary of the trust. The subject of court approval, if desired, should be addressed in the real estate purchase agreement.

Occasionally, you may encounter a property that the seller claims as trust property, but does not stand of record in the name of the trustee. In setting up estate planning trusts, people often fail to fund the trust by actually transferring property to the trust. So, while people may intend property to be in trust, they fail to take the critical step of actually deeding the property into the trust. These properties are not trust properties and they cannot be transferred by the trustee. If you take a deed from the trustee, you will not be able to secure title insurance, and in fact risk losing the property if there is an heir entitled to inherit the property. In these situations, check with the title company to be sure title insurance will be available, and, if not, what they will require to insure title. There is a summary procedure for property worth $20,000 or less.

The only other alternative will be a probate proceeding. Probate Proceedings The representative of an estate has the power to sell any asset of the estate by either a private sale or public auction. Real estate is almost always sold at a private sale where independent bids are solicited by the representative prior to any sale. The key feature of a probate sale is that, unless the personal representative has authority under the Independent Administration of Estates Act, all real property sales must be returned to the court for confirmation. Until the sale is confirmed, neither the personal representative nor the buyer can enforce the sale. However, a written bid cannot be withdrawn once it has been accepted by the personal representative subject to court confirmation.

At the time of the confirmation hearing, other prospective buyers may make offers to purchase the property that exceed the offer being returned for confirmation. Where a higher bid is made at the confirmation hearing, the court is not required to confirm the sale to the higher bidder. If a written offer is made by a responsible person in the minimum amount required in excess of the offer being returned, the court must accept the highest offer if it is to accept any offer, but the court has the discretion to reject the highest offer and order a new sale.

When comparing bids, the court cannot consider the net amount to be received by the estate. The amount of the bids must be considered without reference to any commission owed by the personal representative and without reference to any condition of an offer that a commission be paid by the personal representative. Estate property may be sold for cash or credit. Where this is a credit sale of real property, the unpaid balance must be secured by a mortgage or deed of trust on the property. There is no statutory requirement that the security be a first deed of trust; it may be subject to existing liens and such other liens as are approved by the court.

There is no requirement in the Probate Code that there be any minimum down payment. Court rules in some counties may require a minimum deposit. The prospective buyer should check the local court rules to determine whether there are any local requirements applicable to sales. For example, some court rules provide that a sale will not usually be confirmed where the buyer assumes or takes subject to existing financing if the estate is subject to contingent liability.

Finally, one of the mandatory findings that a court must make before a private sale can be confirmed is that the price is at least 90% of the appraised value of the property. The valuation date of the appraisal must be within one year preceding the confirmation hearing. Probate properties must be appraised by probate referees. While the referees are generally knowledgeable, their appraisals are usually less rigorous than that of fee appraisers. If the appraised value is set too high, a supplementary appraisal can often be obtained using as evidence the arm's length offer from a third party. Independent Administration of Estates

Most California probates are now administered under the Independent Administration of Estates Act. When the procedures of this act are followed, many of the procedures for court confirmation and overbidding can be avoided. When the personal representative has full authority under the act, the property may be sold at public or private sale, and the procedures related to court confirmation, including a sale at not less than 90% of the appraised value do not apply. The personal representative must give notice of the proposed sale to persons interested in the estate. The notice must set forth the material terms of the transaction, including the sales price and the amount of any commissions. If any person objects to the proposed sale, the representative cannot make the sale without the prior approval of the court. The failure of the representative to give the required notice will not affect the validity of the title in the hands of a bona fide purchaser of the property who relied in good faith on the representative's authority. The buyer has no duty to investigate whether the representative has given the notice in the proper manner. The representative's authority to act under the Independent Administration of Estates Act can be confirmed in the representative's letters of administration (the representative's authorization from the court) or from the court's file.

Dealing with property owned by a trust or probate estate may present opportunities for the real estate investor. There are, however, additional procedures that the investor should understand. Failure to follow the correct procedures may lead to title problems that can significantly affect the value of the property. The foregoing has been prepared for informational purposes only and does not constitute legal advice. The information is summary in nature and does not address any particular situation. Readers should not act upon this information, but should instead seek professional advice.