Key takeaways

• Unlike a traditional home purchase, buying from a relative is a non-market transaction; that is, the buyer and seller have a pre-existing relationship.

• Therefore, it may be subject to additional scrutiny by mortgage lenders and has the potential to cause tension in the family.

• In these types of transactions, it is wise to have a real estate attorney draft a comprehensive contract so that all terms are clear and there are no misunderstandings.

Those who want to buy a house but are worried about the high prices of the housing market, mortgage interest ratescompetition from other buyers and the legwork involved in finding the right property? Many of these challenges can be simplified if you have the opportunity to buy directly from a relative, whether it is an aging parent, a sibling who has moved away from your hometown, or any other situation. Here’s what you need to know about how to buy a home from a family member.

Who should consider buying a house from family?

The best candidates for purchasing a home from a relative are those who plan to use the property as a primary residence. “Standard conventional mortgage rules will not allow a buyer to purchase that property as a second home or investment property if there is a family or business relationship with the seller,” says Robert Killinger, senior loan officer at Movement Mortgage in Danvers, Massachusetts. .

An adult child without sufficient savings down payment It may also be a good candidate in a home. “In this scenario, the family member selling the home may be willing to make a gift of equity, allowing the buyer to enter the property with little or no down payment,” says Killinger. Additionally, parents who choose to sell to one of their adult children are spared the hassle of listing and showing their home.

The ideal scenario would be to buy from a family member with whom you have a good relationship and who wants to sell for a fair price, says Matt Teifke, broker and co-owner of Teifke Real Estate in Austin, Texas.

Pros of buying a family member’s home

• Commission savings: If you and a trusted family member agree to a sale, you can: Eliminates the need for a real estate agent. Considering that the typical agent commission is 2.5 to 3 percent of a home’s sales price, this can mean significant savings: For example, if you agree to buy the home for $300,000, you’ll each save up to $9,000 .

• Potentially lower price: Your relative may accept a lower price on the home “because you cut the real estate agent’s commission” and, of course, because you’re family, Teifke says.

• No need to look for a house: Buying a home from your relative means you don’t have to waste time shopping around and looking at homes for sale. And assuming you’re already familiar with the property (maybe even grew up there), you probably already like the layout and features.

• Less need for due diligence: You can have a little more peace of mind that the home is well-maintained, too. “If you have a good relationship with your family member, you can trust them to be honest with you about the condition of the property,” says Teifke. If you are sure of your situation, you can even skip a lesson. professional home inspection and save this cost too.

Disadvantages of buying a family member’s home

On the other hand, relying too much on a handshake agreement with a family member can be counterproductive. The biggest disadvantage of a financial agreement of this magnitude made with relatives is that it creates serious hostility.

“If you don’t take precautions like creating a carefully worded contract, you can create tension and problems,” says Dennis Shirshikov, chief growth officer at real estate site Summer and an adjunct professor at the City University of New York. “Protect yourself and your family members by putting everything in writing and having an attorney review it.”

Any problem at home can be exacerbated when family is involved. “One of the things I see happening often is when a major system like air conditioning, plumbing, electrical or roofing fails after shutting down,” says Kristen Conti, broker/owner of Peacock Premier Properties in Englewood, Florida. “Buyers often feel that the seller – even if they are a family member – is selling them something defective. If someone feels slighted, it can create huge rifts in families.”

How to buy a house from a family member: 5 important steps

The basic process of buying a home from a relative isn’t much different from a traditional sale. Here are five basic steps to follow.

1. Determine your finances: Get pre-approved for a mortgage First, before discussing purchasing the property. Or consult a lawyer to consult a lawyer. owner financing arrangementYour family member will finance your purchase rather than a bank or other lender.

2. Agree on price: Determine whether the sale will be for fair market value or if there will be any gifts, such as a down payment gift, cash gift, or loans to cover closing fees. “Any gift funds will need to be documented through a gift letter and comply with the mortgage lender’s underwriting rules,” says Killinger.

3. Create a contract: Your real estate agent or attorney can draft a formal purchase and sale agreement. This document should outline all the important details and terms of the deal, including the sales price, contingencies, and who is responsible for paying certain fees and commissions.

4. Secure a mortgage: Mortgage lenders are likely to conduct a title search and home evaluationboth will incur a fee. If you would prefer to have your home professionally inspected, now is the time to schedule that as well.

5. Closed: The closing is the final step in becoming the new owner of the property. There will be closing costs and a lot of paperwork to complete that your agent can help you with. Many states require an attorney to oversee real estate closings; so if this is the case in your state, be sure to plan ahead for who will hire them and who will pay the legal fees.

Non-negotiable transactions

A. transaction that is not in line with market conditions A relationship in which the seller and buyer have a pre-existing relationship, whether business or personal. This is different from the typical bilateral bargaining environment, where both parties are strangers and act separately to get the best deal possible, and can complicate matters.

“When people involved in a large transaction such as buying a home have common interests, the risk of fraud increases,” says Martin Orefice, CEO of real estate website Rent To Own Labs. “Fraud can result when two parties collude to sell the property at an artificially low price, or when one of the two parties in the transaction takes advantage of the other.”

As a result, some lenders will not offer mortgages for this type of deal, while others will subject them to increased insurance scrutiny. It’s also a good reason to hire a lawyer, even Don’t plan on using a real estate agent. for transaction.

Consider that tax laws also apply to these transactions. The IRS may review the sales price of a non-arm’s length agreement to determine whether it meets the requirements. fair market value or accepted as a gift. “The closer the home is priced to true market value, the less of a tax problem there will be,” says Orefice. “If you purchase the home for less than market value, you will have to claim the equity gift on your taxes.”

Do’s and don’ts when buying a house from family

To do

• Be fully committed: “Make sure you’re 100 percent prepared for the property in question,” Killinger says. “Emotions can run high when it comes to family property and the buyer should make sure everything is included in the purchase.”

• Get everything in writing: “It is important to have a written purchase contract that includes all the details of the transaction,” says Teifke. “This will help protect both you and your family member in case of any disputes later.”

• Have the agreement reviewed by outsiders: It’s natural to want to save money, but paying for basic guidance from experts like real estate attorneys, Realtors, and tax experts can save you a lot of hassle and family drama in the long run.

Don’t do that

• Accept everything without financing plan: “It’s important to make sure you can actually afford the home before agreeing to buy,” says Teifke.

• Accept terms that are not in your best interest: Just because you take care of your family doesn’t mean you shouldn’t take care of yourself. For example, be sure to get a home appraisal so you can have a professional and unbiased evaluation of the home. house value. “Even if this is an all-cash purchase, pay for an appraisal to make sure the value is fair to all parties,” says Conti.

• Don’t overlook the details: Whether the buyer and seller are related or not, real estate deals are complex. So it might be wise Hire an agent or a lawyer even if you don’t think you need one. They know exactly what needs to be done to close successfully – including filling out the correct paperwork, completing required legal disclosures, and properly transferring title and title – so you don’t have to.