Have you and your family members inherited a property and you’re not sure what to do with it? It might be full of junk. You might have lots of different people who are feeling like a decision-maker and it can get to be a hairy situation. Find out how working with a real estate agent or an investor could be the right solution for you.
This is Emily Cressey. Your digitally enabled, Puget Sound community adviser. Hi, my name is Emily Cressey and I am both a real estate agent and an investor. So I’d like to share my perspective on what I’ve seen. I’ve learned a lot about probate over the years, and that’s the type of situation that I think it makes sense to work with a professional.
What Happens In A Probate?
So typically what happens in a probate is a beloved family member passes away, leaving a house full of stuff, at possibly not in good repair. Maybe some deferred maintenance or just old fashioned, wallpaper and paint and those types of things. Not exactly ready to put on the market and show the next day.
So, people are in a difficult situation. They may have access to that person’s funds in their checking account, but depending on how much cash they have, it may become difficult to keep up with the bills. For example, if there is a mortgage on the property, you’ve got to keep paying the mortgage, taxes, insurance.
And then there’s the question of whether you need to update the home. And then there’s the question of utilities, paying all the other bills. So you’ve got these ongoing expenses that you have to draw from the decedent’s estate to pay the bills. And if they don’t have a lot of cash, that can be difficult.
Typically, elderly people have social security and some retirement accounts and different sources of income coming in that end at the time of their death. So they may have been using that money to pay for their house. And when that income is cut off, there’s a problem.
So, that’s kind of the situation with the monthly bills. On the other hand, you might have a number of people, siblings, if the person had multiple children, who are expecting a piece of the pie when the house sells. But typically, there’s one or two people are in charge of making the decisions and paying the bills.
So there’s a lot of time, energy and effort that goes into these people. They have to do all the work of managing somebody else’s estate on top of managing their own house and property. And third, it’s an emotional time. You’ve just lost a parent in many cases, or an aunt, uncle, grandparent, somebody that you care about and who cared about you. And so it’s emotionally difficult as well.
And the question becomes then, what are we going to do with the property? Are we going to fix it up? Are we going to sell it as is? Or are we going to wait until next spring until the selling season comes around? Are we going to just let it go to be done with it? Because people are fighting and I don’t have time to deal with it. These are the types of situations that people in probate typically have to encounter and make a decision on.
So, if you call an investor, I have worked as an investor. I enjoy investing in property. Typically, the situation is the property is not in great shape. It’s not the type of thing that you could just put on the market and sell. It’s got deferred maintenance. It’s out of date. It looks bad.
Somebody is going to need to put some work into the property to get it looking nice and ready to sell. And the person who puts that work in, work means time and money and the know-how. Do we need to replace the kitchen? Who could say? So whoever does that work is the one that’s going to be getting the financial reward from it.
So typically, if you come in, an investor will say, “If this house were shiny and new and ready to sell, it would be worth X.” Let’s just call that a hundred thousand dollars. These are not Seattle numbers, but it’s easier to work in percentages that way. So let’s call that a hundred thousand dollars that the house would be worth if it were in great condition.
But it’s not in great condition. It’s going to need $20,000 of work to get it up here, where it can sell for. So you’ve got 20,000 in repairs that you need. And then we have the sales cost to consider, commissions, excise, tax closing costs, holding costs, all sorts of things like that. And I usually just use a round number of about 10%. So then we’re going to say, if it’s worth a hundred thousand, 10%, those costs to sell, that’s another $10,000. So we’re down 10 for the cost to sell. We’re down 20 for the repairs that it needs. So, really in its as is condition, it’s worth about 70,000.
So you, as the person in charge of the estate could put in the 20,000 of repairs and then incur the $10,000 cost to sell. It’s just the cost of doing business. And you’d end up breakeven. So if you had $70,000 mortgage or less, you could still do this and get the house sold. Nobody would inherit anything.
Let’s say, for the sake of argument, that you have a $40,000 mortgage. I don’t know. So, in that case you would get the spread. So, if you had $30,000 cost to get it fixed up and sold, and you had a $40,000 mortgage, you would get the difference between 40,000 and 70,000, which is 30,000.
And then you would split that up. Let’s say, it’s you and your two brothers, there’s three kids that are splitting the money. $30,000 split by three. You each get $10,000. That’s the way that things can work. That’s not a lot of money for doing a $20,000 rehab project.
Another way that it could work is you could bring in an investor and the investor would say, “You know what? This property is worth $70,000. But if I’m going to get involved, if I’m going to spend my time and money doing this $20,000 rehab, I need to make a profit.” And what that investor’s profit needs to be will vary by the investor and his expertise, the amount of risk in the marketplace. What’s going on? Is it going to be easy to sell? Is it going into winter? What’s going on?
So he might say, “I need to make $20,000 for this to be worth my time.” And so, he’s not going to buy it for 70,000 because he’d have to do all that work and he wouldn’t make any money. So he’s going to need to buy it for less than 70,000 and how much less is his profit.
So if he says his profit needs to be $20,000, then we’ve got 70,000 minus 20,000. So now you’re at 50,000 and you and the brothers can split the $10,000 profit. So typically, when you’re working with an investor, you’re going to be getting a low cash offer.
And their goal is to just take it off your hands. They’re going to do all the work. You can not worry about the junk, not worry about fixing it up. You’re just getting out of it, maybe getting some cash, but it’s not going to be your highest dollar offer. It’s going to be a low cash offer. $50,000 for a home that could potentially be worth a hundred thousand, but is not worth a hundred thousand now. It’s only worth 70,000 now, max.
So, that’s the way it works when you’re working with an investor. When you’re working with a real estate agent, the real estate agent will come onto the scene and say, “This house needs $20,000 of repairs and you’re going to need to put some work in. Or we can try to sell it to an investor who would like to do that type of a project and would like to realize a profit.”
So, again, if you list the house with the real estate agent for $70,000, will the investor want to pay $70,000 if he has to pay 70,000 and then he has to pay 20,000 to fix it, and then he has to pay another 10% for closing costs? Probably not. So he’s going to need to have his profit and you’re going to need a lower price.
Whether you can get a higher net working with an agent in that situation, is debatable. And it really comes down to the condition of the property and the benefit of exposing it to a wide variety of investors, who are going to put it on the market and look for the investor who’s willing to take a smaller profit. But the real estate agent is going to get her commission as well. So, you’re really having to pay two people their profit, instead of just one when you work directly with an investor.
So frequently, if it’s the type of property that needs a lot done to it, the investor is the end buyer. When you work directly with an investor, you can cut out the real estate agent and the commission, but is that investor giving you the best price? You don’t know.
If you put it on the market with a real estate agent, you’re still going to be selling it to an investor. You’ll have a broader array of investors. They will be competing with each other and you can find one, that’s going to need a smaller profit, but you’re going to have to pay the real estate agent a commission. So there are pros and cons.
It’s going to come down to the actual numbers on your property. And as both an investor and a real estate agent, I would be happy to talk through both of those scenarios with you. So you can see which one is going to net you the most cash, which one is going to happen the fastest. And which one is going to be the easiest for you in terms of do you just want 5,000 bucks to walk away and it’s done tomorrow? That could happen. Or do you want to like hang on? And if it takes a couple of months, it’s okay and we’re going to wring a little bit more money out of it. That’s an option too.
So it really depends on you and your needs and wants, as well as the rest of the heirs and the numbers on the actual property. So if you’re dealing with a probate and there’s a lot of deferred maintenance, you’re selling as is. It’s not the shiny new type of property where the little Pinterest-ready couple is going to come in and look at it. Then I do think it makes sense to consider working with an investor, as well as consider listing with an agent.
I do both. And this is the type of thing that I enjoy. I’d be happy to take a look at your property with you and talk through those numbers. We can come to an agreement that you, and all the rest of the people in the decision are happy with. So, if that’s something I can help you with, be sure to get in touch with my office and we’ll look forward to helping you out.
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Emily Cressey and The HomePro Associates team at HomeSmart.
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