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I was in the Miraloma Park neighborhood of San Francisco previewing homes a few years ago. In one home, a bath on the main level wasn’t finished and fixtures were missing in the kitchen.

On my way out, I mentioned to the listing agent that the home would need an all-cash buyer. He was surprised, not realizing most lenders wouldn’t accept the property.

Buyers would have trouble getting financing on the $1.2 million home, because of its unfinished condition. Later that day, the agent changed the listing to reflect an all-cash sale requirement.

The risk of overlooking financing

Trustees and probate referees often waste a great deal of time on transactions that go nowhere because they haven’t accounted for the building’s finance-ability.

When I help a nonresident building owner and their attorney sell an estate or probate property, I act as their eyes and ears. First, I always review the appraisal’s fine print on building condition. And I insist on viewing all the units, whether tenant occupied or vacant. A drive-by appraisal is worthless — and the probate referee who takes this approach can miscalculate the property’s value by a full 35%.

Appraisal value vs. lendability

On a recent estate project, the trustee and attorney had a newly completed appraisal showing a value of $1.55M. They were impressed with the number until I scoured the document and reported back: “We will be severely limited in marketing the building, because of its deteriorated condition. No matter what the appraised value, lenders won’t like this property.”

Trust and probate properties, by their nature, are often in disrepair. As a former mortgage broker, I can spot the common reasons why a lender will back away, including these:

  • furnace or water heater not functioning
  • electrical wires hanging from removed light fixtures
  • an active roof or skylight leak
  • an unusable staircase due to termites or dry rot

Two solutions for the estate

When maintenance issues threaten to hold up a property sale, I offer my clients two choices. Let me line up contractors and get the repair work done so financing will be available. Or, we market the home directly to a select group of all-cash buyers. I’ve developed a pool of investors who’ve made a career of buying this kind of distressed property.

For example, last year a prominent trust attorney asked me to evaluate a duplex in Bernal Heights. The upstairs unit was vacant and in deplorable shape. The wood around windows was deteriorated, plaster was falling off and the roof was leaking.

The downstairs tenant claimed they wanted to buy the building. This possibility often comes up but the purchase is rarely feasible, and I was able to disprove this option within the week. The owner, who lived in Texas, didn’t want to spend $40K to fix all the problems, so the sale had to go all cash.

I found a cash buyer and the property sold within 7% of its appraised value. The trust got liquidity and closure and the attorney was happy to have the transaction completed quickly.

Need a hand interpreting a trust property appraisal or answers to financing questions? Give me a call — (415) 730-3030.