By Jack Sternberg,
a nationally recognized expert on real estate investment

http://www.askjacksternberg.com

In this article, I want to tackle the legal subject of probate. This may sound like an odd topic for real estate investors, but, in fact, you can often find good investments when someone passes away.

It's a fact of human nature that inheritors of probate estate will often want to sell that property quickly to get the money and aren't always concerned about getting full value from the home. Or, they may live out-of-state and simply not realize the full value of the property. When these situations occur, the opportunities for bargains arise!

What is Probate? The term "probate" comes from the Latin word "probatum" meaning "prove." In other words, the probate is a legal process by which it's proved that a will is (or isn't) authentic.

Specific procedures vary by state, but probate generally includes the following steps: * When a person dies, the will is filed with the local probate court (sometimes called a "surrogate" or "chancery" court). An inventory is then taken of the property. The property is appraised for its value. Assuming the will is determined valid in court, any legal debts (including death taxes) must be paid. After debts and fees are paid, the property is distributed as dictated by the will.

You may wonder what happens if the will isn't valid or no will was left. In that case, the estate still must go through a intestacy"("without a will") proceeding. This means the property is distributed to the closest relatives as dictated by state law.

Since you may be involved personally in probate proceedings (as distinct from an investor's point of view), it pays to know the advantages and disadvantages of the probate system.

Advantages of the Probate System - Probate makes sure that only your beneficiaries receive your property. In other words, it prevents fraud. Creditors have to prove their claims against the estate. The probate process can resolve any disagreements involving your estate and disposition of your assets.

Another advantage is that the probate process limits the time creditors have to make claims against the estate. There's a "statute of limitations." So, if creditors don't make their claims within the specified time period, those claims are no longer enforceable.

Disadvantages of the Probate System - In the opinion of many critics, it costs way too much for the services rendered. They claim that probate provides no real benefits, except to provide lawyers with excessive fees.

An AARP study concluded that the probate process can generate legal fees of 12%-20% of the estate for the lawyer alone. It also concluded that probate can reduce the estate passing to one's heirs by 5% or more. Source- http://www.aarp.org

In a few states, the fees are based on a percentage of the estate. Fees may be based on "gross" probate estate. Additional costs may include court costs, appraiser's fees, etc. Also, basic fees may be set by statute. In addition, if "extraordinary" services are performed, the attorney/executor can ask for additional fees.

A second criticism in terms of the fees charged is that probate is primarily a clerical and administrative skill. Because of this fact, critics say there's no necessity for court proceedings or the research, legal and adversarial skills of a lawyer. They make the claim that the process normally is handled by the lawyer's secretary anyway or by a probate form preparation company. The result is that the beneficiaries end up paying far too much for the services rendered.

Critics also charge that probate proceedings consume too much time. On average, a typical probate proceeding can take between one and two years. During that time, the beneficiaries generally get nothing or, perhaps, a "family allowance" dictated by a judge.

Since probate can be expensive, I'll give you a list of legal avoidance techniques you can use for your personal situations. Because these techniques are not the main focus of this article, I urge you to investigate them on your own. Exemption of certain small amounts of property left by will from probate (depends on state) Living trusts Transfer on death registration for stocks and bonds Gifts made while you're alive. Joint tenancy or tenancy by the entirety Life insurance Pay-on-death financial accounts Retirement accounts

How To Find Probate Estate Properties - Such properties can be hard to find, but there are several sources you can contact.

One source is real estate agents. Contact them to let them know you're interested in such properties, but be sure to specify the type of properties you're seeking and how much you want to spend.

A second source is newspapers. Look at the obituary notices and then check with local property records to determine if the deceased owned local real estate.

Another source is the estate executor. An executor is the person in charge of selling the estate property so he or she is the person you'll need to go through in order to make a buy.

A final source is public records. Wills in probate are a matter of public record, so you can check for them at the local court house or other local governmental agency.

Benefits of Buying Probate Properties - A primary advantage of buying probate properties is great prices! Prices of many of these properties can be as much as 30 to 40% below market value.

Another benefit is a big inventory. The bad news is that we all die. The good news (for the living, anyway!) is that there will always be many probate properties available.

A third advantage is that it's a buyer's market. Many beneficiaries don't really want an inherited property; they simply want the cash from the sale of that property, even if it's a below-market price.

Many beneficiaries also don't want the responsibilities that come along with the inherited property; estate taxes, repairs, maintenance, the mortgage payments, and so forth. So, they're willing to sell at bargain prices.

The Disadvantage of Buying Probate Properties - The identification and buying of probate properties will require patience on your part. Remember, it can take anywhere from six months to two years (or more!) to complete the probate process).

As I said earlier, know the type of probate property you're willing to buy and the amount of money you're willing to spend to get it. If you work with a real estate agent, communicate those guidelines to him or her so they don't waste time on properties you're not interested in.

Key Point: Do your research, work closely with realtors, and have patience!

Published - October 2008