When is 10% NOT 10%?

In California Probate, some properties require court approval to be sold during the probate. That process almost always includes an opportunity for the public to bid on the property, most commonly by offering to buy the property "as is" by bringing a check equal to 10% of the required minimum bid. The required minimum bid is the price that the estate sold the property for, the original buyer, plus 5% plus $500. On a recent auction, I represented a buyer where the original buyer had offered to purchase for $1,300,000 but my client was willing to offer $1,365,500.

So, if you had wanted to purchase the property, how much did you have to bring?

One answer, the most common, is just 10% of the posted minimum overbid. In this case, with the minimum overbid of $1,365,500 the cashier's check would have to be for $136,550. By default, the check is made in the name of the estate, but 90% of the time the attorney has to return the check for a new check or wire deposit as the estate does not typically have a checking account it can use to deposit those funds, and the days of escrow companies taking deposits signed over as 3rd party deposits are over. That all said, is 10% enough?

You might think not. For example, what if the original buyer raises the bid, do you need to not only bid more but bring additional funds? Many investors assume so, and many attorneys will say so, but I have not seen ANYTHING in the law that requires it. In fact, just this past week, I saw an overbidder attempt to have the original buyer disqualified as the original buyer only had their original deposit and did not bring additional funds. In that case, the judge specifically ruled that additional funds are NOT needed as the code would not expect a buyer to assume how much they would want to bid and made the 10% "wet" deposit as sufficient protection for the estate. To add to the drama, the tides were reversed when the bidding exceeded 10 times the overbidder's deposit, and the original bidder attempted to have the overbidder disqualified as having insufficient funds. In this case, even though the overbidder only needed to bring $350,000 to cover the $3,500,000 overbid, they had brought $525,000 to cover them to $5.2 million bid. Yet, when they bid $5.3 million, the original bidder objected, then again the judge ruled that the overbidder only needed the original 10% and allowed the bidding to proceed. In the end, the property sold for $5.6 million, netting the estate an additional $2.1 million as long as the sale closes on those terms.

The challenge is sometimes attorneys will claim additional funds are needed, and an investor runs the risk of losing out on a good deal

The best practice is to bring a check for the minimum 10% needed and get an additional check to cover the maximum bid anticipated in case it is required. In my experience, when the attorney attempts to limit the bidding, its a good deal and you don't want to lose it for lack of preparation.

Interested in bidding on a property at the probate court in Los Angeles? Reach out to me, I'll be glad to help you outline a strategy. My clients have purchased property each of the last two weeks, and I see more coming up.