Alternative Solutions for Workout, Buyouts and Probate Estates
Veteran mortgage banker and probate real estate specialist Rick Harmon
shares with you perhaps the easiest and safest method for selling probate estate,
conservator and trust property most anywhere in California.
Difficult heirs. A depressed real estate market. These are just a few of the
hurdles facing probate attorneys these days. Even in the best of times, the
resolution of a case can take up to a year or more.
Tradition has called for probate attorneys to sell estate-owned real property
when the need to distribute the equity of the property occurs. The challenge
has been the time required to secure a buyer, meet the buyer’s conditions of
sale, awaiting the buyer finding money and closing escrow. A frustrating and
tedious process, at best.
Trying times require creative solutions. Increasingly, probate attorneys are
embracing creative financing as a way to meet the demands of clients and opposition
as well as their own needs, in a timely and more cost effecetive manner. They
are able to put the equity of the real property to better and more immediate
use through mortgage financing.
HOW BORROWERS ARE QUALIFIED
Most everyone is familiar with conventional “bank-type” financing. Borrowers
qualify based on many different factors relating to credit history, job stability,
income and consumer debt as well as modest equity and property requirements.
Probably less than 60% of homeowners meet these rigid guidelines but those that
do enjoy the most favorable interest rates and terms due to lenders’ lower perceived
Conventional financing can be useful where a borrower is financially strong,
stable and credit-worthy and desires to either buy out another’s interest or
buy a property outright with a correspondingly small personal investment, i.e.,
down payment. Non-conforming lenders have emerged to fill part of the gap left
for borrowers who can’t qualify for “bank-type” loans but do pay most of their
debts timely. Just as with conventional mortgages, non-conforming lenders do
require borrowers to own property as an individual (no corporations, partnerships,
trusts or estates). These lenders will, however, require a larger percentage
of protective equity for their loans, averaging 20-40%, depending on the circumstances
of the borrower.
Equity-based lenders are the real specialists of the industry as they arrange
mortgage financing on what’s leftover. By the very nature of financing, the
equity lender understands up front that a given loan request which does not
qualify for other programs will require a larger amount of protective equity.
These loans are certainly more difficult to place and are typically sold to
private investors and pension funds.
Equity lenders have the distinct advantage of being able to loan to borrowers
who are unable to find financing because their circumstances does not fit conventional
or non-conforming guidelines. The reason could easily be due to how title is
held, (i.e., not as a person) or some aspect of the real property prevents it
from fitting any other program. The true advantage here is that the equity lender
has the flexiblity to make even the most difficult loan work, as long as the
remaining equity is high. Equity lenders will typically not loan more than 50-65%
of the value of a given property.
HOW TO USE CREATIVE FINANCING
The practical applications of creative mortgage financing are almost without
limit. There’s hardly an area of law where some practical understanding of how
to utilize lenders is not of significant value. Some of these applications include:
- Marital dissolutions; buy out ex-spouse’s equity
- Partnership dissolutions;
- Remedy foreclosure
- Cash to meet short or long term obligations
- Debt consolidation
- Pay tax obligations
- Pay for legal expenses
Let’s examine a strategy which will appeal to almost every attorney who deals
with clients and wants to be compensated.
EXAMPLE: PROBATING AN ESTATE
In the typical probate estate, what assets which remain are a home, some personal
items and little cash. In our example, Mr. Greene, a widower, passes away testate
(with a will) and leaves behind a modest home in Bixby Knolls valued by the
court appointed probate referee at $300,000 as of date of death. In addition,
Mr. Greene’s estate contains some furniture of little cash value. It also has
against it several claims for medical expenses and funeral costs totalling $10,000.
In addition, a small mortgage exists with a balance of $15,000. There also remains
the matter of statutory attorney fees (your bill) which must be paid at distribution.
Mr. Greene left two heirs, his son and daughter, who are to receive equal
shares of the inheritance. While the son lives out of state, the daughter lives
in the family home and wishes to remain there. She is also the personal representative
and has elected to waive her fee in lieu of paying six months rent.
When further examined, the needs of this estate client appear to be that the
estate rep., an heir, does not want to sell for nostalgic reasons. The brother
however persuades her to list the property for sale with a local real estate
company. After some six months of no offers we learn that the property has actually
gone down in value because of the depressed market and lack of buyers who are
attracted to the outdated interior design and the deferred maintenance problems.
The listing agent confesses that in order to attract any buyer the property
will have to be reduced to $250,000 and the estate should additionally budget
some $10,000 in repair work prior to selling. …Less his commission…less
escrow, title and other closing costs.
WHAT THE ESTATE THOUGHT THEY WOULD RECEIVE
- $300,000 Probate referee appraised value, at Date of death
- $10,000 less medical and funeral bills
- $15,000 less existing mortgage balance
- $7,150 your statutory probate legal fees
- $267,850 what the two heirs thought they would split
IN ACTUALITY, THIS IS WHAT WOULD HAPPEN IF THEY TRY TO SELL NOW:
- $250,000 Current market value (unadjusted for defects)
- $10,000 less concessions to buyer for repairs
- $19,200 less 8% closing costs: broker/escrow/title etc.
- $10,000 less medical and funeral bills
- $15,000 less existing mortgage balance
- $6,150 your [basis reduced] statutory legal fees
- $189,650 What the two heirs would split if sold
Clearly, the two heirs would be in for a surprise if they elected to sell
The alternative is that the estate could obtain a new mortgage qualified by
the equity of the home. This would permit the daughter to remain in the home
and avert the high costs associated with selling at this time.
IF THE ESTATE WERE TO OBTAIN A MORTGAGE BASED ON EQUITY:
- $300,000 Court probate referee basis remains unchanged
- $10,000 Medical and funeral bills
- $15,000 Old mortgage (to be paid off)
- $7,150 [Higher] Statutory fees based on court’s value
- $4,850 Cost of new mortgage
- $ 37,000 Amount of new mortgage
By borrowing the necessary funds, this estate was able to avert selling a home
filled with years of memories.
SELLING OR BORROWING AGAINST A TRUST DEED YOU OWN
An often forgotten method of generating cash is to sell or borrow against a
trust deed note which the client owns. In selling a trust deed, the buyer (assignee)
sells all or part of a note at a discount which gives the buyer an acceptable
yield. A little known technique is to borrow against a trust deed rather than
selling it (called hypothecation in the industry). This permits the beneficiary
to avoid the cost of discounting.
THE HIGH COST OF DELAYS
No treatment of this topic would be complete without spell.ing out what the
costs of case closure delays are. There are many factors about delays which
you may have already considered, particularly from the standpoint of the sole
practitioner. The cost to a client for an untimely resolution can be decreased
value of real property due to a poor market, maintenance and other hidden costs
WHY BORROWING MAKES SENSE
The primary reason borrowing is attractive is because it allows for a low cost,
almost immediate means of resolution. When selling real property there are a
vast number of mostly uncontrollable factors which hamper the ability to locate
a buyer and close in reasonable time.
If you don’t consider financing as a viable alternative to selling you may
be shortchanging both your client and your firm. The key in all opportunities
is to encourage the client to keep an open mind and to remember that creative
financing can be an attractive option to selling real property.
Rick Harmon is president of The Suburban Group, mortgage bankers specializing
in probate and trust real estate. He has assisted over 400 probate attorneys in
finding creative financing solutions for their clients.