Purchasing Investment Properties
With Probate Issues 
 

Here is an interesting deal that illustrates the mechanics of probate or estate investment home purchases.

The Seller (I'll call him Scott) co-owned this house with his mom, and both had signed on the loan. Unfortunately Scott’s mother died three years previously.  

Scott allowed the sister to live in the house, but she did not make the mortgage payments which were now 6 months in arrears. Scott is tired of dealing with the house and is ready to sell. But when he and his mother bought the house, they did not purchase with ‘joint rights of survivorship”. Had they bought in this manner, if and when either died, total ownership would have passed immediately to the other person.

To complicate matters more, Scott’s mother left no will for her estate with six other siblings all awaiting their share. If that's not enough of an investing adventure for you — the bank is threatening foreclosure so time is of the essence to create a deal.

In fact, the bank is not just threatening….the house is scheduled to go to the courthouse steps in three weeks. Why would anyone even try to purchase a mess like this with a short timeframe? Well, Scott owes $33,000 + $5,000 in back payments. The house just needs cosmetic repairs totaling no more than $10,000, and the house will have a market value of about $140,000.

That leaves approximately a $92,000 margin less expenses until the property sells – definitely worth pursuing as an investor!

I calculate that the most I could offer on the house (and still leave a $30,000 profit) is $79,000. After the $38,000 to the bank, that leaves $41,000 for Scott and his mother’s estate. There is an incredible deal if we can work through the probate issues. But I’m sure you’ll agree that it is worth the trouble!

So, how do we work through the estate controversy? The challenge here is to get all of the siblings to work together. As long as no one contests the proceedings, the probate through the courts is rather simple. However, if just one sibling contests the distribution, then the probate can take a long time, and make some attorneys rich. As an investor, our job in these situations is to clearly demonstrate to each and every sibling how it is in their best interest to cooperate – this is not an east feat.

First, all of the siblings have to agree on the sale of the house, and the percentage that they will receive. Remember, Scott will get his 50% as the half owner, plus he is entitled to 1/7 (he and 6 siblings) of the other 50%. Unless it is a close family, this will often be a sore point. Next, all of the siblings have to agree to appoint one of them as “Administrator of the Estate”.

If agreement is difficult at this point, the leverage is that if they do not reach an agreement soon, they won’t have to worry because the bank will foreclose, and everyone will lose everything. It is clearly in their best interest to work together – quickly.

Once they all agree, then the courts will appoint the Administrator who can sign for the Estate. As the investor, I will need Scott to sign the Purchase & Sales Agreement as the 50% owner, and I will need to the Administrator of the Estate to sign for the other 50%. If Scott is the Administrator, then he will need to sign twice: once personally, and once as Administrator of the Estate.

Next, we need to stop the bank from foreclosing. In this particular deal, there was not enough time to complete the purchase, so I took a risk. I had already run title, so I knew that only the first mortgage existed as a lien. I agreed to make the $5,000 payment of the arrearage to the foreclosing attorney to reinstate the loan, and stop the foreclosure quickly. To protect my interest, I had Scott sign a 2^nd mortgage for that amount over to me with a one month maturity. That way, if they did not ultimately sell me the house, they would have to pay me back or I could foreclose. This was a safe rick given the profit potential.

At this point, with all of the probate issues resolved, the Purchase and Sales Agreement signed, and the foreclosure stopped, the closing could proceed like normal. As an investor, the key is to understand how the probate issues work, and help the family reach a quick and amicable resolution so that everyone can prosper. 

Best of Success & Abundance,

Lou Castillo,
Real Estate Investing

National Trainer and Mentor....
www.InvestorRiches.com

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