Need For Court Approval
Generally, court approval is required for situations where there is concern that the price is not representative of fair market value. Some common examples where court approval may be needed are bankruptcy sales, probate sales, and guardianship sales. These types of sales share a common characteristic, namely, the protection of third party’s interest. For example, if a home is being sold by a bankruptcy trustee, the creditors have invested interest in the outcome of that sale. To avoid the appearance of impropriety and discourage any other shenanigans, the listing agents will typically ask for offers to be submitted in a sealed envelope along with a check for 10% of the purchase price. The offers will all be opened, and the highest offer will be selected. The selection will be subjected to court approval.
This system protects the creditors from unscrupulous agents who may conspire with investors or their friends to purchase the home for below fair market value and then report to the bankruptcy trustee that no offers were presented.
Court Approval Procedures
When court approval is required, the court will confirm the sale of real estate to either the original bidder or to an overbidder at the court confirmation hearing. At that hearing, which is open to the public and is often attended by interested parties, the original bid may be subject to overbid by another purchaser. Generally, the overbid must be significantly higher than the original bid. For example, in a probate sale, the minimum overbid amount must be (1) the amount of the original bid, plus (2) at least 10% of the first $10,000 of the original bid, plus (3) at least 5% of the original bid in excess of $10,000. If a higher offer is accepted, the buyer must have cash or a certified check with them in order to be confirmed as the highest bidder.
If there are multiple bidders or if the original bidder wants to bid higher than the first overbid, they will have the opportunity to do so at the confirmation hearing. Generally, the bid increment required after the first overbid is set by the court. The court will accept bids in much the same manner as an auction until the highest bid has been made at the confirmation hearing.
Clients often want to understand the best bidding strategy in these circumstances. After understanding the process, some buyers question whether it makes sense to bid at all or should they just appear at the court confirmation hearing. While it is possible that this could be a successful strategy, we generally counsel our clients to submit a bid and not wait. How much to bid? We suggest the bid to be slightly below what the client thinks is the fair market value for the property. The objective is to submit an offer that is relatively low, but not so low that another prospective buyer would still consider the property to be a bargain even with the overbid.
While there are certainly opportunities to find a relative value in these circumstances, there are also many traps for the unwary. It is very important to work with an experienced real estate agent, or better yet, consult with a real estate attorney before entering into any kind of sale that is a bit more unusual or creative. While these types of sales are fairly straightforward, it is quite possible for a buyer to enter into an agreement that they don’t understand, especially if they are working with a real estate agent that is unfamiliar with the various opportunities, strategies, and potential pitfalls.