How Factoring Can Help Heirs Maximize the Value of Inherited Real Estate
Throughout Florida, and nationally, heirs are under pressure. They have lost a loved one and stand to inherit assets. The receipt of that inheritance, however, is stalled for various reasons. The most common delays relate to the probate legal process. Courts are backlogged, and complications arise. Such as locating heirs or resolving disputes among them. The legal process requires many steps to complete probate. These inlcude notification of the decedent’s creditors so they can make claims on the estate’s assets, among other requirements. Learn how factoring can help heirs maximize the value of inherited real estate.
It’s noteworthy that in Florida, the decedent’s primary residence (homestead) is exempt from creditor claims. This means descendants may inherit and sell the homestead without regard to the decedent’s debts. A major exception to this creditor protection is when the homestead is pledged as collateral to secure a debt, such as with a mortgage on the property. Creditors can make claims on other estate assets, but the homestead is protected.
Problems for Heirs Selling Real Estate
Most estates include real estate as the most valuable asset. The decedent will usually leave their homestead, and sometimes, other investment properties to be inherited. The usual probate delays create problems for heirs waiting to receive title to a home and the legal right to sell it.
There are carrying costs that won’t wait for the completion of probate. These costs include mortgage payments, property taxes, HOA dues, landscaping, maintenance, and utilities, among other expenses.
In addition to the carrying costs, the properties often need repairs to make them suitable to sell on the multiple listing service (MLS) with a listing agent for full retail value. The MLS is the largest sales platform that gets maximum marketing exposure.
Such financial challenges frequently create motivated sellers. Many estates are short on cash to pay for repairs and carrying costs while awaiting the completion of probate. The heirs become pressured into making quick cash deals.
Investors Seeking Probate Deals
There’s a cottage industry of real estate investors seeking probate deals. They contact personal representatives (also known as executors) or their attorneys through public probate court records and other databases. These investors are cash buyers who buy homes in any condition, close quickly and pay closing costs. For these benefits, estates pay the price by selling at a significant discount from market value.
As the adage goes, investors make their money when they buy, not when they sell. They need significant discounts from market value to preserve their profit margins. For cash purchases, the prevailing “maximum allowable offer” formula says investors should pay no more than seventy percent of the market value minus the costs of necessary repairs.
In contrast, retail mom & pop buyers purchase homes in which to live, and typically pay full, or close to, market value. Sometimes, in hot sellers’ markets with short inventory, retail buyers pay above asking price and more than the appraised value.
The Factoring Solution
Fortunately, there’s a solution for cashflow-strapped estates to help the sell properties for fair market value. It’s called factoring and here’s how it works. Factoring is a financial transaction in which the owner of a receivable asset, such as an inheritance, sells that asset to a third party at a discount. That third-party purchaser is the factoring company.
Historically, factoring has mainly been a business-to-business transaction involving the sale of accounts receivable. Factoring businesses also use a consumer model to buy assets from individuals benefitting from discounted money now, instead of waiting for a long-delayed payout, such as with structured settlements or lottery winnings. The factoring company earns its profits through the discounted purchase price. They pay less on the front end to receive more when they collect later.
Factoring is a natural fit in the probate context, especially with respect to estate properties. Most probate matters have a reasonable level of certainty as to the value of the estate, but much less predictability regarding is completion timeline. A factoring business can evaluate the value of the estate, or a share of it expected to pass to any of its heirs, and offer to buy it a certain discount.
The heirs benefit from receiving the needed immediate cash infusion to pay the property’s carrying costs and renovation expenses to sell for top retail dollar. Realtors seeking listing agreements with estates would help their prospective clients by informing them of the factoring option and helping them understand the potential benefits.
The factoring solution is not right for everyone and heirs should conduct careful due diligence to determine if it’s a good fit. Heirs pay a price for the money now through the factoring fee discount. They should estimate their expected return on investment for paying that price. If accepting the discounted price for the sale of an inheritance brings significant returns, it’s a smart investment.
A home mortgage may be in arrears and under the threat of foreclosure. Property taxes may be delinquent with a tax deed auction looming. The HOA may have a lien for unpaid dues. The home may need a new roof before getting any serious MLS traction. If paying the factoring fee saves the home from being taken or enables the estate to make improvements that generate a greater return at the closing table in excess of that fee, then it’s worthwhile. If the numbers don’t add up and the fee can’t be justified, then the estate should pass on the factoring opportunity.
Who Are You Going to Call?
There are many factoring companies for estates to consider, but I recommend Probate Cash for the following reasons. Probate Cash and its parent company have a stellar reputation in the factoring industry. It should come as no surprise that a business model such as factoring, that deals with businesses and individuals in need of fast cash, would include some unethical and exploitative players.
Probate Cash’s management team follows the ethical path of full transparency and no hard-selling or manipulative tactics. They use a purchase agreement written about as simply, and as devoid of “legalese,” that such a financial agreement can be. There are no hidden fees or surprises for the consumer, unlike how other factoring companies operate. The purchase terms use a sliding scale model that ties the factoring fee to how quickly Probate Cash gets paid. The quicker the completion of probate and distribution of assets, the lower the fee.
Of significant importance is that Probate Cash purchases assets on a no-recourse basis. This means that should Probate Cash fail to collect the full value of the share of the estate it purchased, the seller has no personal liability for that shortfall, unless the seller has committed fraud or otherwise violated the terms of the agreement. This no-recourse arrangement is a risk that Probate Cash assumes to the benefit of heirs.
If you’re an heir to an estate facing probate and other legal challenges, or a realtor seeking to serve estates through your services, contact me to discuss how I can help you navigate the probate and real estate waters to successful outcomes.