Be honest: what comes to mind when you hear the word estate?
Outside of a real estate context, I would more than likely picture a house like the one above. Some mansion in the British country-side where a Bond villain lives, or where some old white man shoots skeet while his butler lets the clay pigeons fly.
I have a feeling that most of you would side with me on this one and think of “estate” as a piece of land.
Maybe it’s because we collectively drink a lot of wine from companies called something like “Jackson Estates.”
Or maybe we vacationed at a place with “estate” in the name?
Search for the definition of the word “estate,” and you’ll likely find two results:
1. an extensive area of land in the country, usually with a large house, owned by one person, family, or organization
2. all the money and property owned by a particular person, especially at death.
“in his will, he divided his estate between his wife and daughter”
While I would love nothing more than to delve into photos and fantasies about the sale of mansions in the Swiss alps, it is, of course, the latter of the two that I want to talk about today.
I’ve been on both sides of estate sales in the real estate market, having sold properties on behalf of the beneficiaries of an estate, as well as having represented buyers in the purchase of a property that had been owned by a now-deceased person.
These sales can be anything from easy and common, to downright nightmarish.
And over the past few weeks, I’ve come across both situations where the parties have handled the sale the right way, as well as where the process was unnecessarily difficult.
The first thing you need to understand with an estate sale is that when a person dies, and leaves a property to their heirs, the propety must “pass through probate.”
You hear this a lot in real estate.
Sometimes, you’ll see “Please Include Probate Clause” on the listing. That’s not good. More on this later.
Other times, you’ll hear the listing agent say, “The property has already passed through probate, we can do any closing you want.” That’s great. More on this later too.
To understand probate, let’s check out what Investopedia has to say:
Probate is the term for a legal process in which a will is reviewed to determine whether it is valid and authentic. Probate also refers to the general administering of a deceased person’s will or the estate of a deceased person without a will.
After an asset-holder dies, the court appoints either an executor named in the will or an administrator (if there is no will) to administer the process of probate. This involves collecting the assets of a deceased person to pay any liabilities remaining on the person’s estate, and to distribute the assets of the estate to beneficiaries.
Probate is the analysis and transfer administration of estate assets previously owned by a deceased person. When a property owner dies, his assets are commonly reviewed by a probate court. The probate court provides the final ruling on division and distribution of assets to beneficiaries. A probate proceeding will typically begin by analyzing whether or not the deceased person has provided a legalized will.
In many cases, the deceased person has established documentation, which contains instructions on how his or her assets should be distributed after death. However, in some cases, the deceased does not leave a will.
Let’s ignore that last bit about what happens if the deceased person doesn’t have a will, just for the sake of simplicity.
So imagine that John Smith who owns 123 Fake Street in Toronto passes away at the age of ninety-six after a fulfilling and wonderful life. In his will, he bequeaths his property to his only son, Jim.
If John Smith passes away on January 1st, when do you think Jim is able to sell that property?
That’s the million-dollar question, and it’s where estate sales in our real estate market get very complicated, very quickly. It’s also where, in my humble opinion, some people do it right, and many do it wrong.
You see, the process of “passing probate” takes time. Often lots of time.
But whether the time is a little or a lot isn’t nearly as problematic as the fact that the time is always indeterminate. Probate could take six weeks or it could take six months, but the larger problem isn’t the time as much as the variability.
Imagine that Jim Smith, upon inheriting his father’s property on January 1st, decides to put the property up for sale on January 10th. What does Jim do about the closing date?
Here’s where things get tricky for a slew of different reasons.
Jim’s lawyer will tell him that “probate takes time!” So Jim decides to offer the house for sale looking for a 120-day closing.
Right there, Jim is going to lose potential buyers. Not all buyers are able, or want, to close in four months. In today’s market, very few want to, and many are unable. So if Jim is really going to sell this property before it passes through probate, he has to know he’s thinning his buyer pool.
Only, in my experience, sellers like Jim don’t know this, often because they hire listing agents who don’t tell them. More on that later.
Now, what would happen if Jim sold the property with a 120-day closing but the probate process had yet to be finalized by the time the 120 days was up?
Well, technically, Jim would be in breach. That’s not a good position to be in!
Jim’s lawyer may have told him that probate “should” be done in six weeks, and thus a four-month closing was sufficient, but problems arise with probate! And what if, oh, I dunno, say, a worldwide pandemic happened and the municipality was closed for months on end? Yikes!
Most people in Jim’s position will include a clause in the Agreement of Purchase & Sale that protects them in situations like this.
“The Buyer and Seller agree that the Seller, upon providing a minimum of ten (10) days’ written notice to the Buyer (excluding Saturday, Sunday, or statutory holidays), may unilaterally extend the date set for completion, one or more times, not to exceed 180 days in total, for the purpose of obtaining a Certificate of Appointment of Estate Trustee.”
So you and your partner happen to be Mike Buyer and Maude Buyer.
You find a house that you absolutely love and you decide to make an offer.
The seller wants a whopping 120 days to close so you provide it.
You also sign the Schedule B which happens to include the above clause.
I have no idea. Because I’ve never sold to clients in this situation before.
I don’t like selling properties to my buyer-clients where probate hasn’t passed yet, and I’ve only actually done this twice. The first time, I went forward without issue. The second time, my clients tried to pull a fast-one when they purchased pre-COVID, and tried to leave the door open to getting out of the deal, and being able to move forward with the transaction at the same time. The whole thing was a fantastic mess as they were on the wrong end of some absolutely awful legal advice, and thankfully, they didn’t get sued. They closed on the purchase three months after the scheduled closing date.
And that was an example where we thought the purchase of an estate sale would be easy!
But what about Mike Buyer and Maude Buyer?
What do they do once they’ve purchased a house with a four-month closing, but the seller reserves the right to extend the closing another six months?
What if they own a condo? When do they sell it?
What if they rent? When do they give notice?
The clause written above mentions only ten days’ notice! So what if Mike and Maude have sold their condo and are preparing to close on the house, and then eleven days before the scheduled closing, they get a notice from the seller saying that the closing date will be moved four months? As per the clause, they can do this again, provided the give ten days’ notice, for another two months.
“Not to exceed 180 days in total.”
Sure thing. It’s only a half of a year!
These clauses can be edited to the liking of those using them, so this could be thirty days’ notice (which it should be), and could be longer or shorter than 180 days.
But that clause above doesn’t specify what happens to the Agreement as well as the deposit if the probate hasn’t passed by the end of those 180 days.
This is also where transactions become problematic.
That clause should have a provision for the “unthinkable” just in case it happens. It should say something to the extent of:
“….in the event that the Certificate of Appointment of Estate Trustee has not been received by the Seller at the completion of the 180 days specificed herein, the Buyer shall have the option, at his or her sole discretion, to terminate this Agreement, after which the deposit will be returned in full with no deduction.”
Open-ended clauses are legal nightmares just lurking in the dark.
Buyers and sellers always think that probate will take time but will ultimately pass, and all will be well. But when you leave things to chance, you can’t control the outcome. I’m a control-person, so suffice it to say, the few times I’ve represented estate sales, I’ve had lawyers draw up the clauses, unlike most of the listing agents out there representing estates today. I took that clause above – with the open-ended 180 days, with only 10 days’ notice, from an active listing. That’s a problem waiting to happen.
So what’s my advice for people who don’t want any problems on the sell-side?
Oh, it’s so simple: wait for probate to pass before selling.
This isn’t a cop-out. This isn’t me taking the easy way out. In fact, it’s the exact opposite.
A little over one month ago, I met with a family who had inherited a downtown property from a deceased relative.
I told them, “You shouldn’t sell this property until probate has passed.”
Do you know what they told me?
“We spoke to two other agents, and they both said to sell now.”
I’m telling you now what I told them then: most agents merely care about getting their proverbial sign in the lawn. They want the listing. As soon as possible. In fact, now would be the best time.
How many agents are going to walk into your home and say, “I know you want to sell now, but I’m happy to work with you over the next two, three, or six months, and work toward getting the highest possible price by setting up the best possible conditions?”
But I did. That day, with that family.
I explained to them that the stakes in our market are too high to not sell any property in a perfect situation, especially when you control the situation.
Many buyers aren’t interested in long closings, indeterminate closings, and/or flexible closings.
In our market, the best results on the sell-side arise when there are a slew of interested buyers. This is why, as we have discussed ad nausem, most listings are under-priced and an “offer night” is held one week later. Get eyes on the property, draw people in, and have them bid against each other.
Now, if you randomly eliminated a subset of buyers, say, all the buyers who’s names start with a vowel, or are born in the summer, then you’d have fewer buyers interested in the property, and likely end up with fewer offers, and a lower sale price.
Sometimes, the elimination of buyers in the buyer pool isn’t random.
Like when you push away buyers who don’t want the uncertainty of buying a property that hasn’t passed through probate.
And this is why I advise all would-be sellers so simply wait the six weeks or three months so they can set the table for a successful sale.
That’s what I’ve told two potential sellers since this past summer, and both took my advice.
Others may not agree, since we see properties listed on MLS all the time where probate hasn’t passed.
There’s absolutely no question in my mind that the process of selling a property is much easier when it has passed through probate, and likewise, no question remains about the difference in sale proceeds one would obtain if title were free and clear.
If you’re a seller, heed my advice.
If you’re a buyer, be very, very careful.
And if you’re reading this and you’ve been in these situations before, we would all love to hear some real-world examples!