The shrinking values in the real estate market are truly frightening these days. I have received reports that values are falling less to approximately 25% of peak values (i.e. a 75% decline in value). I have even seen reports of homes being listed for as little as $100.00 in certain parts of the country. In recent weeks, I have encountered several situations where precipitous valuation declines impact the decision of whether to commence a probate proceeding.
The typical situation involves a decedent-borrow who was struggling to remain current on his mortgage and/or found himself with an ‘underwater’ property (i.e. a property where the loan balances exceed the fair market value). With the death of the borrower, it is not usual that the loan is not being paid and frequently there are few resources available to make such payments. Sometimes the loan is already in foreclosure and literally weeks away from auction.
Recently, I encountered one situation where, at best, the estimated fair market value of a condominium was approximately $200,000 with equity remaining of approximately $10,000. With the mortgage several months in arrears and the foreclosure process already started, the heir wanted to know if the property could be ‘saved’ or somehow the foreclosure process could be stopped. While it is within the probate court’s power to temporarily stop an asset sale, most courts are reluctant to issue an injunction if it will be a useless act. With little cash in the estate it was not clear that filing a probate proceeding to save the real property from foreclosure would be a productive exercise.
Using this situation as an example, if the property would be sold, typical property sale commission and closing costs are approximately five percent of the gross sales price or, in this circumstance approximately $10,000. Moreover, to process the probate, the costs and statutory fees alone, which are measured on the gross value of the asset (not the equity), would exceed $15,000.00. With more in minimum costs and fees to handle the matter, what would remain in the estate? Under these circumstances, nothing would be left for the heirs or beneficiaries. Worse yet, the executor could easily lose money filing the proceeding, especially if non-probate assets (such as the administrator’s personal assets) are used fund the administration process.
It is entirely possible that other assets justify or require a probate filing. It is also possible that an administrator can negotiate to reduce outstanding loan balances which would warrant a probate filing. Painful as it may seem, however, sometimes the best course of action may be to do nothing. Naturally, such an important decision should never be made without deliberate consideration, counsel and an understanding of the personal risks associated with electing to lose the real property to the lender.