Assuming there is no living trust, standard probate procedure is necessary to administer an estate. Those procedures are discussed in our article on Probate in California.
Many estates own real property which should or is required to be sold by the executor or administrator. Assuming the Will is subject to the Independent Administration of Estates Act (“IAEA”) by its terms, the procedure is simplified, but if it is not, or if the executor elects, the procedure for overbidding the offered price in court described below is required. While this article relates directly to San Francisco Probate Court, most courts follow substantially the same procedure in California.
Basic Procedure for Sale of Real Property:
Procedures for selling real property are governed by Probate Code (“Prob. C.”) §10300 et seq. An Administrator may be appointed with either full or limited authority under the IAEA. Under the IAEA (Prob. C. §10400 et seq.), if an Administrator is appointed with limited authority, court supervision is required to sell, exchange or grant an option to purchase the estate’s real property. Prob. C.§10501(b). An Administrator appointed with full authority may elect to have the sale confirmed by the Court, but is not required to do so.
Regardless of authority, a Notice of proposed action (Sale) is required. When the value of the property for sale is greater than $5,000, the Notice of Sale of Real Property must be published. The Notice is required to contain: 1) the mode of sale; 2) place, date and time of sale; and 3) description of the property.
Though not required, it is suggested that the Notice also contain: 1) instructions to submit bids in writing to the Administrator’s attorney; and 2) terms and descriptions of acceptable alternative bids (cash or credit). Most courts will deny confirmation if the bid varies from the terms specified in the Notice.
For detailed Notice requirements, see Prob. C. §10304. Publication must be completed before the date of the sale. For detailed publication requirements, see Prob. C. §10300 and Government Code §6063a.
By custom, the Notice requires a 10% deposit. It is advised that the deposit be made payable to the Administrator and not the attorney or broker. The deposit is then available to the estate if the Buyer defaults. It is also more easily returned if the property is ultimately sold to an ‘Over bidder’ at the confirmation hearing.
The Notice of Sale must be provided at least 15 days in advance, by mail or personal delivery. Prob. C. §10586. Section 10586 does NOT extend the time for service to be deemed complete - i.e., adding 5 days for service by mail per CCP §1013(a).
The heirs have 15 days to object to the Sale. If no objection is made, the sale may proceed without a court hearing. An interested party that fails to object to the proposed sale at this time waives the right to object to the accounting. Failure to give proper notice, or provide proof that notice was received, is one of the limited cases in which the Court may review the sale.
If an objection is made, the objecting party may request a restraining order, in effect forcing the sale to go under court supervision. The court must comply even if no notice is given to the Administrator, nor good cause shown. Prob. C. §10589. At this point, or if there is no IAEA process allowed in the Will, the sale is subject to court confirmation and the overbid process, detailed below.
Once the sale is closed, it is reported to the Court on the Accounting filed by the Administrator when seeking final distribution. The Accounting includes the date of the sale, when and to whom notice was given, whether notice was waived and by whom, and whether objections were received.
Report of Sale and Petition for Order Confirming Sale of Real Property:
If, however, the Administrator has limited IAEA authority, the sale must be reported to and confirmed by the court before title passes to the Buyer. Prob. C. §10308(a). The confirmation process approves not only the sale of the property, but also authorizes the payment of broker commissions and expenses.
When confirmation is required, best practice suggests the Administrator enter into a contract of sale only after the Notice of Sale is given, or the judge may not be able to confirm the sale. When an acceptable offer is set forth, it is accepted conditionally, pending confirmation by the court.
The Administrator must report the sale and petition for confirmation within 30 days after the Sale. Prob. C. §10308(b). (Use Judicial Council Form DE-260/GC-060.)
Hearings on the confirmation of sales of real property are held at 9:00am, Monday through Wednesday. See San Francisco Superior Court Local Rule (“LR”) 14.59. Once a date is obtained, the notice of the hearing and service copies of the petition and offer details are mailed to the heirs and interested parties at least 15 days in advance of the hearing. Prob. C. §1220.
At the confirmation hearing, the court considers the necessity of the sale, its benefit to the estate, and the Administrator’s fiduciary duty. Conditional offers are typically NOT accepted, so financing, approval inspections, and other standard (non-probate) contingencies must be completed before the hearing. If potential Buyers have been denied opportunity to inspect the property, the court will continue the sale to allow inspection.
Under court supervision, certain restrictions apply to the listing price, acceptable offers and brokerage commissions. These restrictions are detailed below. Presuming the sale may proceed, the original bid is presented at the hearing and other buyers may ‘overbid’ it in set increments determined by the court. The Original Buyer may participate in the overbid process. Prob. C.§10311, 10313.
In most circumstances, the court accepts the highest written offer. Statutory exclusions are detailed below. In exceptional circumstances, the court may vacate the sale and order a new sale. LR 14.65(I).
Upon confirmation of the sale, a conveyance is executed. This conveyance will refer to the order confirming the sale. A certified copy of the order must be recorded along with the conveyance. Prob. C. §10314(a).
Overbid Procedures:
Under court supervision, the listing price is established from the Probate Referee’s appraised value. For the court to confirm the sale, an acceptable offer must be at least 90% of the Probate Referee’s appraised value, which value must be set within one year prior to the confirmation hearing. Prob. C. §10309.
The Original Buyer must deposit 10% of the purchase price prior to or on the day of the hearing. If the court confirms the sale to the Original Buyer, their deposit is applied towards the purchase price. If the court confirms the sale to an Overbid, the Original Buyer is refunded their deposit.
The court will set the overbid increments (i.e. $500; $1,000; etc.) but the first overbid must exceed the Original Bid by 10% of the first $10,000 plus 5% of the remainder after the initial $10,000). Prob. Code §10311(a), LR 14.65(D).
Example:
Property listed at $400,000. Accepted Offer is $360,000.
10% x $ 10,000 = $ 1,000
5% x $350,000 = $17,500
Minimum overbid is $360,000 + $1,000 + $17,500 = $378,500.
Bidders must have at the hearing a cashier’s check (or cash) for 10% of the overbid amount in order to be considered. LR 14.65(E). Bidders are advised to bring written and signed bids with the amount initially left blank, to be filled in as soon as the highest bid is accepted. If the Buyer defaults after the sale, their deposit may be forfeited.
If there are several acceptable overbids, the court shall accept the highest bid. Prob. C. §10311(b). The court has discretion to decline all bids and order a new sale (Prob. C. §10311(c)), but continuances are made under exceptional circumstances only. LR 14.65(I).
Prior to the hearing, the Administrator must notify the court what, if any, alternative bids would be acceptable to the estate, i.e.: the sale is for cash but the higher offer is on credit. Prob. C.§10311(d).
Bid amounts are considered by the court in gross, exclusive of brokerage fees. Prob. C.§ 10311(e).
Only written offers may be accepted and confirmed. Oral offers made in open court must be reduced to writing before the close of the hearing. Estate of Roberts (1990) 225 CA3d 1017, 1022; 275 CR 575. The court clerk will provide counsel an overbid form. LR 14.65(F).
Once a bid is accepted, the court approves payment of brokerage commissions. If not specified by contract, the court determines the amount. Generally, the broker for the Original Bidder is allowed 5% of the sale price and the broker for the over bidder is capped at 50% of the overbid amount. See LR 14.66 Broker’s Commissions and LR 14.67 Broker’s Commissions in Overbid Situations for applicable rules in one- or two-broker situations.
Unless instructed otherwise by the Administrator prior to the hearing, the court will accept the highest written offer.
Conclusion:
The overarching theme of the process is to allow the highest price in a fair procedure. Once one comes to court one soon realizes that there are “professional” over bidders who are well versed in court procedure and make a regular practice of seeking to purchase the property in probate. However, most Wills now incorporate the IAEA and it is usually a discretionary decision of the administrator to decide if the chances of a higher price are worth the time and trouble of seeking the overbid procedure.