New York Real Estate Lawyers Blog
Our firm has often been consulted by clients who inherited a house from their parents, and wish to sell the property, as they may have moved out-of-state, and the property became vacant after the passing of the last parent.
Usually, this is a straightforward transaction, which often requires legal assistance in acquiring legal authority to sell the property as part of an estate. This involves experienced counsel filing for letters testamentary (if there is a will) or letters of administration (if there is no will). Once the Surrogate’s Court issues the proper legal document, then the sale can proceed.
However, there is often another issue, which may become known to the surviving children only after their parents’ death. It is possible that the parents borrowed against the property, even after the original mortgage that they took out to purchase the premises was paid off. Often a reverse mortgage is taken out by the elderly parents, in order to raise funds to continue to live in the house. Generally, such mortgages are only available to homeowners over the age of 62. Once the loan funds are disbursed, there are no monthly payments. The full amount of the loan would then be due after the death of the last borrower.
The lender will become aware of the death of the last borrower, and then sends a demand letter requesting that the amount borrowed (plus interest) be paid within a certain time. If it is not paid, foreclosure proceedings will be brought, and the loan paid off from the proceeds of a Court-ordered sale.
What are the alternatives in such a situation? If the sales value of the house is greater than the amount due on the reverse mortgage (or other type of mortgage), then the house can be sold through a real estate broker and part of the proceeds can be used to satisfy the mortgage. The remaining funds would belong to the heirs, in the same proportion as their shares of the inherited property, or in accordance with the provisions of a Will.
If the amount of debt on the house is greater than the equity in property, the property is considered “underwater.” In that case, the executor or administrator has several choices. He can request that the lender approve a “short sale,” which means that the lender agreed to accept less than 100% of the amount owned, so that the property can be sold to a third party. The necessity of such an approval would be included in the contract of sale drafted by a qualified attorney, with the sale being voided if the lender does not approve.
The other alternative is simply to allow the lender to foreclose on the property. Since the borrower is now deceased, there would be no liability to the heirs if the property is foreclosed and sold at auction, even if the property is sold back to the lender. The lender must go through the Court foreclosure process in order to have the loan satisfied. In such a circumstance, the estate would have no further liability once the Court-ordered sale occurs. Therefore, it may be plausible for an executor or administrator to allow a property to be foreclosed, assuming it is “underwater.”
Our firm has extensive experience in advising those who may have inherited property of their legal options, and welcomes such inquiries.