Real estate can be one of the most highly valued assets within an estate. Dealing with its sale or transfer effectively may be the greatest challenge and opportunity for the Personal Representative (PR).
Prior to activity to sell real estate the powers to sell property must be granted by the probate court or trust agreement. With this secured and with receiving legal advice throughout the process from an estate planning attorney the Personal Representative can proceed to sell real estate.
There are a number of unique costs associated with real estate, some of these costs or more obvious than others. There are monetary costs in holding real estate in an estate, opportunity costs, such as, what the proceeds would have earned in a money market account, if the property was sold at an earlier date. Another time related cost is the amount of time and attention, the PR must devote to the sale of the real estate properties.
Perhaps, the greatest cost is the silent “emotional cost” placed on the PR to be surrounded by all of the deceased loved one’s personal effects and faced with the reality that everything “must go” somewhere else. On this subject see our article: “Dealing with personal effects”.
The following is a variety of challenges and opportunities that a Personal Representative may face when selling real estate within the context, of their new-found fiduciary duties.
Challenges
No ready market for real estate exists (as compared to stocks or bonds)
Unknown future sale price and net proceed amounts
High transaction costs
High carrying cost (maintenance, insurance, mortgage, taxes, etc.)
Length of time to sell asset.
Distance (may be located in different state)
The unknown? - vacant homes and properties, are susceptible to; theft, vandalism, frozen or broken pipes, and who knows what else?
Decay, improved real estate if left alone, will usually decline in value over time (in varying degrees).
Prospective buyers may feel that an “Estate Sale” gives them a competitive advantage in negotiations.
Potential stress of “need to sell property” to raise funds for taxes, or make distributions to beneficiaries.
Opportunities
You only need one buyer
Seller can set the price and “everything is negotiable”
Appraisals can be helpful, but they don’t tell the full story.
Property can be enhanced, to improve marketability and sales price.
Timing – Real estate many times has a “selling season”
A well selected Realtor can be a valuable resource.
Marketing, Marketing, Marketing
Think about creative opportunities. Ask around…
“In Kind” distributions to beneficiaries
No ready market for real estate exists (as compared to stocks or bonds)
Contrary to popular believe, real estate is really not much of a market. At least, when compared to other markets, such as the stock market, the investment grade bond market or even the grocery market. The problem is, that each piece of real estate is unique (un-standardized) and the number of buyer participants is usually small and their needs are unique. Stocks trade every few seconds and they are considered volatile. Real estate trades slowly and expensively (high transaction costs) and are perceived to be stable (and predictable) in price.
Unknown future sale price and net proceed amounts.
Regardless of real estates investment merits, real estate is a thinly traded market at best. The market price for real estate assets “has to be discovered” by buyer(s) and a seller (you). When demand is strong the “price discovery” favors a higher price when demand is slower “price discovery” suggests a lower price, advantage buyer. But demand for property is buyer specific, which can be a fickle as fashion and change as nearly frequently as the tide. Keep this in mind, when the inevitable question from beneficiaries comes up, “how much are we going to get from selling mom and dad’s house? The real answer is you really don’t know…nobody does. Guessing may only give them expectations that you may fail to meet, hold off in giving price estimates based on your own personal judgments.
High Transaction Costs
In addition to an unknown sale price, net proceeds will be depleted by brokerage commissions, pending taxes and on going expense. The standard brokerage commission rates for residential real estate is 5 to 7%, and 7 to 10% on raw land. But everything is negotiable.
Keep in mind that negotiating a lower commission rate may lessen the exposure, attention and purchase support you get from realtors. For a seller, to achieve a sale at an attractive price it is essential to maximize exposure, demand and transaction support.
For sale by owner offerings may be attempted initially (if the property can be shown by the Personal Representative) for a few weeks in high demand markets. Under normal conditions, most buyers consider a FSBO as a reason to offer the seller 6 or 7% less in offering price (at least). In addition, FSBO sales do not have “a friend” in the buyers camp (the realtor) supporting the transaction. Often FSBO sellers receive lower proceed amounts due to weaker demand, discounted prices, and a greater time drain of capital.
Length of Time to Sell
Time in most regards, is not a friend of the Personal Representative. Mortgage payments must be made, insurance kept current, landscaping and housekeeping maintained. Taxes and expense in essence accumulate daily. Demand for capital also grows over time whether they be; property tax liabilities, federal and state income tax, as does the pressure from beneficiaries to be paid out. If there is no cash reserves to pay federal estate taxes an extension may be granted with interest.
A real estate rich cash poor estate will have potentially serious liquidity issues. In some circumstances, it is conceivable that selling some real estate could take years to liquidate.
Realtors emphasize pricing homes and properties at reasonable upon listing because there usually is considerable interest in the first 60 days of listing thereafter, activity and interest generally slows considerably. Accepting this circumstance, it is also incumbent upon the Personal Rep. to have the home looking most presentable at the time of listing.
Distance
It is common today for families to be dispersed geographically from their parent or relatives residences. In addition, vacation and investment properties are often in different states. Caring for and visiting far flung properties can be a huge time commitment for the Personal Representative. Preparation and planning is essential, have a “things to do list” and arrange for reliable local assistance in advance. Utilize your local contacts; your realtor, accountant or attorney should be able to offer you referrals regarding some of the services you may need.
The Unknowns
Vacant homes and properties, are susceptible to; theft, vandalism, pests, frozen or broken pipes and who knows what else? The house needs to be as secure as possible. Check all locks to make sure they are working properly. Leave instructions with your realtor to close drapes curtains and blinds when leaving. As part of the listing agreement a realtor may be willing to systematically “look after” the property and report to you any issues. Installing a lock box may be worthwhile as long as, access can be limited and records of entry are maintained. All valuables and important personal effects should be removed before any public access is allowed.
Decay, improved real estate if left alone, will usually decline in value over time (in varying degrees).
Homes are not like wine, they do not get better as they age.A small roof leak can turn into a major disaster if no one is there to notice. Wood rots, pools need service, grass grows, and lawns need irrigation. Outside areas and furniture may get moldy. Appliances may be more likely to fail due to lack of use. Expect that you will have issues in advance and have a referral network available to do required maintenance and repairs. Keep a vacuum near an entrance closet and ask that your realtor use it after every few visits.
Prospective buyers may feel that an “Estate Sale ” gives them a competitive advantage in negotiations.
This may be the case, but it does not need to be broadcasted when showing the property to prospective buyers. Talk to your realtor about keeping your matters confidential. Also limit your discussions with neighbors regarding your circumstances and the sale of the property. Maintaining a positive attitude is important as others may view your frustrations as an opportunity to suggest a lower price. In the final analysis, when it comes down to the nitty-gritty if you have a weak hand, you should act like it and not bluff. Just don’t show everybody your cards.
Potential stress of “need to sell property” to raise funds for taxes or make distributions to beneficiaries.
A lower price sale property under normal conditions brings a new batch of prospective buyers. Don’t “hold out” for your price too long. Prices may weaken further in the future. If you have executed your sale strategy and have a professional realtor and the property still hasn't’t sold, realize there is only so much you can do. Your duty as Personal Representative is to do your best, not to be a miracle worker.
Some estate taxes may be deferred with interest if liquidity is very tight. Also an alternative may exist to get an equity loan on the property (talk to your attorney for advice and discuss the alternative with beneficiaries).
OPPORTUNITIES – Ok, now the good news
You only need one buyer
To move a stocks price a few points, thousands of transactions must occur. In selling real estate you only need one buyer who “values” what you are selling. When buyers are new to an area, they may only visit 5 to 7 homes. They often face time pressures and deadlines that the seller is unaware of. Consider the likely profile of your prospective buyers. Ask your realtor what attracted prospects to your property? What are your properties unique features? And how can be illuminated? Likewise what are your properties drawbacks and how can they be reasonably mitigated?
Seller can set the price and “everything is negotiable”
To sell a stock at a certain price you have to wait till the market gets there. With real estate only one buyer has to get there. Customarily everybody wants “top dollar” when they sell something. But it may make sense to price an asset at a slight discount if it means a quick sale and lessening the expense of the cash drain. Forecast 6 or 12 months of property expenses (and the hassle factor) and consider front loading the expense in the sale price discount.
While most realtors hesitate to give you information about prospective buyers, it can be critical. Is the property in a golf community and would the buyer appreciate the golf cart in the garage? Is there personal property that can be a hassle to move, like a hot tub? That can be thrown in? Price is just one item that can be a factor in a sale. Maybe flexibility regarding the closing date is helpful. Buyers like everybody else appreciate an act of good will.
Appraisals can be helpful, but they don’t tell the full story.
Professionally written appraisals are required in most circumstances when settling an estate. Appraisals are important documentation that can support a Personal Representative’s actions. Appraisal are an un-biased estimates of “fair market value”. Written appraisals can be critical in valuing the estate for estate tax purposes as well as, facilitate the distribution of “in kind” assets to beneficiaries. Appraisals also provide a “ballpark estimate” of what a reasonable gross (before expense) selling price might be.
Because appraisals are done utilizing historical comparable transactions they tend to lag the market. In quickly advancing price environments, they may be below the current market level. In a declining market, they may “overprice” the price potential. Some assets are simply hard to get comparable data on. Lakefront and ocean waterfront properties may have a scarcity of transactions. In some locations, high demand properties stay in families for generations. It is very hard for an appraiser to quantify the value of a great mountain view, a deep water dock, towering oak trees, or the value of being located adjacent a state park. If you are truly dealing with something “special”, then you may want to “ask around” for more grass root advice before you list the property at the appraised value.
Appraisals exclude all the expenses related to the property which accumulate monthly. also excluded in the appraised value is the brokerage sales commission and closing costs. Make sure that the beneficiaries understand that their proceeds amount from sale will be much lower than their percentage share of the value stated in the appraisal report. If you give beneficiaries an estimated price range of sale proceeds they tend to remember the high number and hold you to it.
Property can be enhanced, to improve its marketability and sales price.
Realtors have a keen sense on tips that can improve the aesthetic appeal of a home. There is an emotional aspect involved for many buyers, they are not buying property they are buying “their future home”. If fix up funds are available, ask the realtor where money will be best spent. Make as many enhancements to the property as possible before it is listed. You only get one chance to make a good first impression. Certainly, get rid of the clutter and personal effects before any prospective buyer enters.
Timing – Real estate many times has a selling season.
Florida ’s selling season is in the winter. The northeast and cold market locals the real estate market usually peaks in activity in the spring or summer. School ending and starting dates are critical time periods for families with young children. Be ready for your peak season. Have all your enhancements to your property completed and suggest to your realtor that they allocate additional advertising funds during this period. When there are no leaves on the trees, 4 foot of snow on the ground or when its 96 degrees in the shade, it’s hard for buyers to get excited about your “special property”.
A well selected Realtor can be a valuable resource.
A realtor in most circumstances is a necessity for the Personal Representative when real estate is to be sold in an estate. Some of the reasons are obvious, like the marketing clout and advertising budget available. Other reasons are more subtle, yet equally important. When the Personal Representative employ a realtor it provides a layer of professional advice, objectivity and a sale methodology which will likely limit potential criticism.
Commission fees are a considerable expense. It is incumbent upon the PR to get their “money’s worth” by developing a realtor selection method and a sales strategy which maximizes the likelihood of success.
Find out who the sales leaders are – 80% or more of real estate is sold by 20% of the realtors. You want to work with the winners.
Request (3 or 4) written marketing plans from top producing realtors.
You have more authority to ask for more things before you award the listing than afterwards. Let you prospective brokers know that there will be competition and that you are looking for a marketing plan that is beyond the basics. You want specific ideas and strategies tailored to your property’s target market.
Have the marketing plan disclose specifically the publications that the property will be listed in and the frequency and duration. Other services may include a weekly monitoring visit of your property. You want details, details, details and all of the realtor’s creative ideas, in writing.
Limit your discussions regarding fees discounts If you start the process by “hard balling” it for the lowest fee the realtor may pare back the marketing plan commitment which is egregiously counterproductive. After you have reviewed the winning proposal, see if they are comfortable accepting a modest fee discount. The greater the discount you press for the greater the realtor will discount their efforts.
Personality, chemistry and comfort level with the realtor does matter . But don’t make chemistry the dominant criteria in the selection process. You are looking for the whole package.
In the most general sense, marketing is nothing more than ideas that will create qualified traffic of lookers to your property. Have your realtor visit other agency offices. If traveling 15 minutes more in commute time provides a better value for a prospective buyer, then let your home be the alternative.
Think about creative opportunities, Ask around…
Talk to your neighbors, if they have friends visiting maybe they would like to see the home. Postcards can be sent to all the neighbors in your community featuring your property. The neighbor may be the pseudo salesperson and encourage the prospect to buy. If you know individuals who invest is real estate, let them know about the opportunity and ask them to spread the good word.
In Kind” distributions to beneficiaries
Realize that if a reasonable price is not available, it may be possible to distribute “in kind” the entire property to a single person or fractional ownership to multiple beneficiaries. When multiple beneficiaries receive an “in kind” share in a property, each party should seek separate legal advice in advance to understand any future control issues (rights to sell) and to ensure the proper titling of the property. Other factors to consider are taxes and maintenance and availability of shared use. It tends to get increasingly complicated (and possibly contentious) when more “personalities” enter the mix.
In all important matters, seek qualified legal advice from an estate planning attorney or tax advice from tax professional who understand your relevant circumstances and considerations.
