House flipping TV shows talk about foreclosures, short sales, bankruptcies, and REO's. Barely half the population understands the difference between them, and a mere half of those grasp the reasons why they make for spectacular house-flipping opportunities.
Nonetheless, almost everyone overlooks the probate sales. In this competitive seller's market, probates are the flipper's underdog.
The probate's origin story is nowhere near as dynamic as the renowned foreclosure. A house goes into probate when the owner passes away. Sometimes there is no will, other times there is. Generally speaking, there is a deep excess of belongings left behind. The house isn't going to be in good shape. When life is slipping away, who has time to apply a fresh coat of paint or add granite countertops - let alone clean the house?
There are all types of legal issues that come with divvying up several-hundred thousand dollars (or millions) of equity. Behind all this, the children are crossing their arms and shaking their heads. No one wants to step up and make the mortgage payments. The house begins to slip into foreclosure. The designated probate attorney informs the decedents (those entitled to the equity) that if they don't act quick, the bank will gobble up the entire value, leaving them with nothing.
The kids sell low, but not too low where the amateurs start throwing their children's college savings onto the walls of the house. The kids are dispersed and living their own lives. Heck, there's a good chance these siblings don't like each other anyway. They just want to get it over with, get their money, and move on with their lives.
It's a beautiful thing when you don't have to compete with 31 other offers like you do on the foreclosures.
HOW PROBATES WORK
When someone dies, the house is generally their biggest asset. A house is worth a lot of money, and everyone has to make sure they get their cut.
In order to get your offer accepted, you have to put 10% down into escrow. That's right, a 10% earnest money deposit that you can't access for the duration of the escrow. The 10% isn't actually legally enforced anymore, it's simply a relic of older times. You might get lucky and find one that doesn't require it, but chances are, the amateurs will be hopping all over that one too.
Then you have to wait 45 days for them to process the paperwork. You actually do nothingduring these 45 days.
You can not cancel the escrow if you change your mind. It's sort of a harrowing decision to make. But any experienced flipper will tell you to not hesitate. The market is simply too hot right now to not strike decisively.
During this time, the listing agent will still go ahead and try to market the house. It's their job. The listing will, however, be pending. Because of this, it will be much harder to market.
Then, after 45 days, this house goes to something called the overbid court. As the name suggests, the overbid court is where even more people will go to beat your initial bid. That's right, after 45 days of your money being tied up, there's still another shot that someone will outbid you. If they do, you do get your deposit back.
The advantage that you have is that the starting price will be around 5-10% higher than what your offer got accepted at. Keep this in mind as the benefit of having your money tied up for those 45 days.
Hopefully, no one shows up to court on the day of the overbid.
HOW TO FIND THEM
Finding an active probate is easy. A good Realtor should be able to set the "sale type" to "probates". That's one way. Many probates are listed as standards sales, due to negligence of the listing agent.
Finding the pending ones is harder. Secondly, you have to search for the keywords. "Overbid" is an important one. "Court confirmation" is good. As with any flip, be diligent about the search process. Finding the home is more than half the battle - it's the whole battle. It's where the majority of your energy should go because that's where the majority of the money is made.
If you really wish to not use an agent, go on Zillow, and navigate to the buying section. You'll see the tab on the top, then choose the MORE tab. For keywords, put "probate". It'll search for listings with probate in the description.
As of the time of this writing, none of the big 4 home search sites, have a "probate" tab. Basically, get a Realtor®.
Then, call the listing agent (or have your agent call), and ask how it's coming along.
My favorite question is, "besides price, what are the sellers looking for?" Because honestly, who wants to compete on price? What are you, Wal-Mart?
Competing on terms makes you a winner. Not only does it make you seem more respectful to the listing agent, but you get creative with winning. Maybe the sellers don't want to move out all the old junk. Offer to take care of that.
On the other hand, maybe they want a quick close. If that's the case, remove all contingencies.
They could also really just want the highest price. I'll definitely give my father a ring and ask for some more cash.
Whether or not you got your offer accepted, the 45 days leading up to the overbid court date are important.
Get in touch with the listing agent or probate attorney associated with the account. You should be able to find the listing agent's phone number on Zillow. As for the attorney, your own agent would have to do some digging.
1. Ask what terms are required at the court. Sometimes, they take cash only at the court. That's also excluding hard-money financing. You have to have the proof of funds ready. This means bank statements showing you have the cash ready to go on the spot.
2. Prepare cashier's checks. The most important one you have to bring is for 10% of the purchase price. Then, bring your personal checkbook, and be prepared to write another 10% of whatever you bid more. For example, if you bid another $10,000 over the initial overbid amount, be prepared to write another $1,000 in personal checks.
This process differs, so make sure to verify with the listing agent or attorney.
3. Look for more flips. The 45 days are a nice buffer for you to gauge the true value of the flip. Although a long time, investment decisions are made after a night's sleep. If you do find a better one, however, you won't be able to pull your deposit out. You'll just have to hope someone comes to bid on it higher than you do.
4. Call the listing agent and see if he or she is getting more calls on the property. While listing agents are usually reluctant from sharing activity from other buyers, if you ask subtly, they'll hint at it.
5. And of course, be prepared to get the ball rolling on rehab. Time is money in real estate - and flipping is no different.
6. Go spray-paint the property and really make it look haunted. If you win, you're going to paint over that anyway. (Kidding. This industry can already be classless enough.)
If you're reading this, you probably live in the San Fernando Valley. It takes around 45 minutes from the North Valley to the Stanley Mosk Courthouse (111 N. Hill St, Los Angeles). 45 minutes is agonizing if you're kid's college tuition depends on this flip. Court doors open at 8:30 a.m. sharp. You can arrive at 8:45 and still be fine. From the time you enter the parking structure to getting to your department - I'd say ten minutes.
Parking can be tricky for newcomers. The address leads you to Hill Street, where there is $25 parking. If you're late, it's tempting.
Instead, get onto 1st Street. You'll see two parking lots directly across from the Courthouse. Both of those are validated. You'll likely get into Lot 26. But if it's full, Lot 17 will be open. It requires full payment up-front, but if you validate that inside, you'll get a refund. You're about to spend a bunch of money anyway.
Once inside, they check you for weapons. Although bidding gets competitive, your glock isn't the best answer for winning. After, you enter a foyer with four elevators. The rush of a multi-purpose government building is overwhelming and intoxicating.
Across the elevators is a directory for the departments. Find yours, then stand in line behind everyone else. Yes, it's that busy. And no - 99.9% of them are not there to bid on your property.
You'll arrive at the proper department. The room will be used for several different cases at the same time. It makes it that much more nerve-wracking to bid in front of everyone. Courtroom drama is already profitable daytime television. The bizarreness amplifies when you realize people are there to resolve deep interpersonal issues. You're there to profit off someone's passing.
The judge calls your case up. You and your competition get up in front of the entire room. If it's like my last probate, you'll be ecstatic to see that only the original offeror showed up. The look on his face reminds you that you're in court.
You'll almost never see more than 5 parties there. Half of them are fly-by-night flippers who didn't do their due diligence, or don't have the connections to contractors that you do. There might be the hedge fund guy who represents $10 billion, or the divorcee who's not buying to flip - but is buying to live in it. Her margins will be smaller than yours.
Last but not least, the owner of the house might arise from the dead and be there to protest against your bids. If this is the case, then you have no right to the house.
Bids tend to go in $5,000 increments. Keep this in mind when strategizing. Because of this, your offers will be moving in $10,000 increments. For example, the starting price is $5,000. You bid, so it shoots up to $10,000. You're on top, but if anyone pipes up, you're going to be paying $10,000 more than where you were before to beat them. In other words, your next offer is going to be $20,000.
I like to take a confident approach. Bid decisively and with no fear. Scare your opponents. If you look like you always win, then folks think you have money. Wearing a suit and looking like you represent a hedge fund certainly intimidates the fly-by-night flippers whose agents email them a couple homes a month. Look like you know something they don't - like you're fine with making $5,000 on this flip.
Alternatively, you can attempt reverse psychology. Act scared with each one. Be dramatic like there indeed is no more upside on the flip. It might scare them. As with any auction, the judge will proclaim "going once, twice...", at which point you interrupt at the last second. Hopefully by that last second, the adrenaline of the auction will have worn off, and your competitors sober up. Hopefully - just hopefully, they don't bid against you.
It's important to note that auctions like these can become emotional. Use it to your advantage - but don't let it make you bid too far.
If you win, you'll meet the attorney and exchange information. Congratulations, you're in. Hopefully you just secured [at least] a $50,000 paycheck in three months. I like to start texting my contractors right then and there. I might even ask my significant other where she wants to vacation.
If you lose, you'll watch the above-mentioned episode play out. You'll sort of be left standing there. The bailiff might tell you to get off the floor. You can leave. No one calls after you. I'll at least tell the listing agent/attorney to keep me in mind for backup offers. Get your parking validated downstairs where you were checked for weapons.
On the way out, there's a cafe I've never been to. Whether you win or lose, there's simply too much to do. That's the beauty of real estate.