As an Atlanta probate lawyer, I’ve dealt with dozens of Georgia estates that include a home with a mortgage on it. How to handle the home and mortgage in Georgia can be difficult to determine, especially if the mortgage loan balance is close to the value of the home. The following is a basic guide to follow, though I urge any person facing this question to contact a Georgia estate attorney before following through on any decisions as each situation has specific facts that may not fit neatly into any of the scenarios below. Also, the guide below only takes into consideration financial considerations of the estate and heirs, not any sentimental attachments that an heir may to a home, which should be taken into consideration when determining how to proceed.
- If a Georgia estate holds a home in good condition with a mortgage, and the mortgage loan is significantly less than the fair market value (“FMV”) of the home (by at least 10%), it usually is best to continue to make payments on the mortgage and plan on either distributing the home to the heirs or selling the home directly from the estate as quickly as possible to relieve the estate of the ongoing mortgage payments and other maintenance expenses. The more valuable the home, the more this makes sense. A $500,000 home with a $450,000 mortgage is more likely to yield a benefit to the estate and its heirs than a $50,000 home with a $45,000 mortgage.
- Same scenario as above, except the home needs repairs. The personal representative should obtain an estimate of the repairs to determine the cost to the estate. If the repairs will cost the estate more than the equity in the home (FMV – loan balance), then it probably will not make sense to make the repairs. Even if the repairs will cost less than the equity, the personal representative and heirs should take into consideration other factors such as taxes, maintenance, and, if the plan is to sell the house, real estate commissions. These other costs may eliminate any remaining equity after repairs and, therefore, defeat the value in spending limited estate funds on continuing mortgage payments.
- What if the FMV of the home is more than the loan, but not by much (less than 10% more)? Again, the personal representative and heirs should take into consideration those other expenses. For example, if a $500,000 home as a $450,000 mortgage, selling the home for its FMV will not result in $50,000 in net proceeds if a real estate agent is used. After taking out the standard 6% commission from the sales price, the net proceeds will look more like $20,000. Now assume the annual property tax on the home of $5,000 hasn’t been paid yet (they are typically toward the end of the year). The estate most likely will pay some share of those upon the sale of the home. Let’s say half. The net proceeds are down to $17,500. Is the personal representative going to take the statutory allowed commission of 5% (2.5% of money received by the estate [the net proceeds] + 2.5% of the money distributed from the estate [distributing the proceeds to creditors and heirs])? Now the proceeds have been wiped out, probably not what the heirs were expecting when they first learned the home had $50,000 in equity.
- If, at the end of the day, selling the home doesn’t make sense, what options are left. One option is to let the estate sit on the home until the home appreciates. This would have made sense a few years ago in the height of the real estate bust of 2007-2008. Would it make sense today? Remember, it would require continued payments on the mortgage, insurance, taxes, and maintenance, so the decision to make such payments needs to be weighed against the probability that the home will increase in value and by how much… a difficult task even for a skilled appraiser.
How to handle mortgaged real property in a Georgia estate can be tricky. While the guidelines above provide some insight into particular situations, they are not intended as a substitute for legal counsel from an experienced estate attorney. Please email me or call me at 404-467-8611 to find out what the circumstances of your case require.
