This is Rick Harmon and welcome to the Gordian Knot, the podcast show where we talk about chaos and dysfunction in probate for us in real estate ownership messes. This is episode 17, and I want to talk about DUST. No, not the kind of stuff you wipe off the shelves or the stuff you leave on the countertops. It’s a tool for looking at properties, real estate specifically, as it relates to demand utility scarcity in transferability. You may already be familiar with this term if you went to law school, especially if you’re old school and went to a university back in the ’60s, ’70s, maybe even the early ’80s. I’m not so certain it’s so commonly used today, but it’s a great term for looking at situations involving real estate. So let’s apply it to an example or two.
Before the last great recession and real estate meltdown, a real estate person, actually an unlicensed wholesaler if you will, was going around telling friends of mine about a property that she wanted to sell. She had it under contract. However, the property had major issues and she was trying to make a spread on this, I guess. Under contract she was attempting to sell this property and make a little bit of an arbitrage on this, but she didn’t own it yet. Thank god for that.
So here are the basic facts. The property description was a single family house, a one bedroom, one bath. In some worlds we call that a dingbat, meaning it’s got limited appeal. Probably not for a large family. Might be ideal for an older individual who prefers living in a single family house as opposed to an apartment unit. They can walk all the way around it. They have some privacy and they can stay in their home relatively unmolested from the outside world. That part was decent, but that’s where it stopped. As it turned out, this property was high up on, in essence of a cliff, of a hillside area of city terrace, part of the city of Los Angeles, East LA, almost near Cal State LA. And the lot was almost un-buildable were it not for the fact that there already was a property there, but you couldn’t drive to the house.
So what you had to do was you had to walk up some rickety steps, concrete as they were, to get to this. Looked like heck. That was probably a tough thing for an older senior. Heck, I’m 64, to walk up these steps. So is the demand for a property like that very high? Not very. Is the utility for this property very high? No, not really. Is there a scarcity? Well, I’m happy to say that there aren’t many properties like that, at least not in Southern California. Maybe a few parked up on cliffs and what have you. But if they’re next to the ocean, they’re much more desirable. But this one had even a worse problem and that was it did not meet transferability requirements. It was a pre-probate, just the term that we use, meaning that there had never been any transfer of the property into the name of a living owner or into a trust or any kind of an estate plan and there was no individual who could deal with the now deceased owner’s estate or willing to, or it be even bond-able.
And so the situation then became that they’re unable to transfer the property as it was sitting. The only other way that I could see is if there was an existing loan on the property, which there was a small one, and the loan was somehow foreclosed on, or if a receiver was appointed, not likely because the property value was so low and not enough to pay a receiver, or if the property went to property tax sale and someone acquired it at the Los Angeles County tax bidding process during the auctions they have once a year, twice a year. So that situation didn’t really go anywhere. I don’t know anybody even bought that property. Probably should have been done, as it should have been maybe scraped and that’s where it stopped.
In another case, a real estate agent that in particular was going around looking for opportunities to do probates. In essence, he was looking for listings for properties that were in essence were underwater. Meaning they were undervalued and over encumbered, and he was interfering with the normal process of reverse mortgage lenders taking these properties to non-judicial foreclosure sale, clearing title and getting rid of the inventory. Now I’m sure his motivation was to get a commission, but in the end what happened was is it further stuffed the court with unnecessary cases.
So let’s apply the DUST formula to this. Were these properties desirable? Well, possible. Was there demand? Probably some demand. So that takes care of the D in DUST. Were the properties high utility? Well, I’m sure they varied, but most of them were single family homes. Nothing in particularly unusual. So they probably met the utility criteria. Scarcity? Well again, they were not exactly special in those respects. They were over encumbered and they were probably occupied by family members, but that caused other issues in terms of possession, but as far as the scarcity of the properties, probably plenty of them, lots of them for sale in 2010 and ’11. What was more scarce was the buyers. So the demand wasn’t that high. Utility, yeah was there. Scarcity? Not particularly high in the scarcity department?
Transferability? This was an issue. The transferability requirement was not met because these properties were not probated. Mom and dad bought a property. Property was encumbered with a reverse mortgage. Both mom and dad passed away. The last being the one that triggered the reverse mortgage loan. Now there is a problem. There is no equity in the property. Somebody has basically taken all the benefits out of the property other than possession. They live in the property, but they can’t sell it because they can’t transfer it. There is nobody withstanding. There’s no open probate. So what this agent and some others were doing is they’re opening up probates left and right merely to bypass the non-judicial foreclosure process for these lenders.
And so ultimately what happened is the courts were stuffed up with all these probates and I don’t even know if the attorneys were paid because that’s one of the first questions that I always ask when I’m dealing with an attorney referral. My client base is basically 96%, 97% by attorney referrals, by the way. So it’s a natural question to ask, is how’s the attorney going to get paid? But the key thing in this problem was is because of the lack of transferability, they’re forcing probates that are absolutely unnecessary and the only one who’s really benefiting, because there was no equity in these properties to pay out creditors, unsecured creditors, let alone heirs or beneficiaries. So the only ones really being benefited were the real estate agents, and that’s an unfortunate situation. When I see that, I see, oh that’s an abuse of the court system.
So, the big takeaway on this I think is that when you look at demand, utility, scarcity, transferability and apply that to new client situations or if you discover that there are real estate assets and these properties don’t meet any of these criteria or are missing one of them in a big way, you’ve got a problem and it may not be worth the squeeze. Or as I ask the other question is, is the juice worth the squeeze? I hope you’re having a great day and I’m looking forward to sharing with you on episode 18 and we’re going to talk about fractions, fractional ownerships.
This episode is brought to you by closeprobate.com, loans and solutions for cash poor California estates and trusts. You are listening to the Gordian Knot with Rick Harmon.