The post How to Buy a House From a Family Member by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.
Whether your parents or grandparents are moving to a smaller property, or a sibling or cousin is moving to a different state, keeping the property in the family can benefit everyone involved.
Buying a home from a family member can be an opportunity to secure a fair price and avoid potential home-buying pitfalls. But there are a few points everyone should be aware of to negotiate and finalize the deal. Read on for all the details of how to buy a house from a family member.
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Understanding the Ins and Outs of Buying a House From a Family Member
A non-arm’s length transaction is the business term for buying a house from a family member. A non-arm’s length transaction is where the buyer and seller have a relationship with one another. This can be a family member, a friend or a business partner.
When the buyer and seller don’t know each other, as is the case in most real estate transactions, each looks out for their self-interest. This is an arm’s length transaction.
In a non-arm’s length transaction, the buyer and seller often try to help each other. Transactions between relatives are often described as a non-arm’s length or arm-in-arm transaction. An example of a non-arm’s length transaction is when an adult child wants to purchase their parents’ or grandparents’ home and both parties are helping the other with a better price, a fast sale and creating the most favorable terms.
How to Buy a House From a Family Member
If you’re ready to buy a house from a family member, below are the steps to take.
Assess the Property
Conduct a thorough inspection and appraisal of the house. Start by looking around the home and noting what you want to ask an inspector about. Be especially alert for cracks in the foundation or damage to major systems like the roof, HVAC, windows, doors or plumbing.
Hire a professional appraiser and an inspector. Depending on the property, you might need to hire specialized inspectors for the foundation or if the property has fireplaces. Involving professionals can give you an unbiased evaluation and clear assessment of the property’s condition.
Establish a Fair Purchase Price
Once you have an inspection to understand possible repair costs and a current appraisal, you have the information to determine the fair market value of the property. You can also consider getting a comparative market analysis and speaking to local real estate professionals to understand recent comparable sales or comps.
Finance the Purchase
When purchasing a home from a family member, there are different financing options. In addition to a traditional mortgage, you could consider seller financing. In that case, the family member will act as the mortgage lender.
You could also receive a gift of equity while securing a traditional mortgage. In this case, the seller decides to take a lower amount from the home sale, giving the buyer a gift of equity. The homebuyer can use this as their down payment. If the gift of equity is worth more than 20% of the home’s value, the buyer could avoid paying private mortgage insurance.
If you use seller financing, it’s essential to set clear terms and conditions for the financing agreement and stick to them to avoid straining the relationship.
Factor in Legal Considerations
Even when buying a home from a family member, legal professionals often need to be involved. You may need a real estate attorney to draft the contract and a title company to clear the title. Both professional services can ensure a smooth and legally compliant transaction
Remember that even among family members, it’s important to draft a purchase agreement or contract to protect both parties’ interests.
Likewise, there may be potential tax implications or estate planning considerations related to the transaction. For example, if a gift of equity is more than $17,000 for an individual or $34,000 for couples, it must be reported to the IRS, and the family member who made the gift may need to pay gift taxes. You can check with a tax attorney or certified public accountant (CPA) to understand possible additional tax implications like capital gain tax.
Complete the Transaction
To complete the transaction, you must follow a few steps. Remember that it’s important to have a professional closing process. Below is what you need to get to that point.
- Decide on financing. The buyer can get preapproved for a traditional mortgage or consider seller financing.
- Get an appraisal and inspection. This will offer objective professional advice to set a fair price.
- Agree on a price.
- Create a purchase agreement. This will be a legally binding contract between buyer and seller. You can hire a real estate lawyer to draft this.
- Go through underwriting. This allows the lender to review documents related to the mortgage and finalize terms.
- Perform a title search. This ensures that there are no unexpected liens on the property.
- Close on the home. Both the buyer and seller must sign the final documents. A real estate professional at the closing can ensure the transfer of title goes smoothly and everything is set for the new home. This includes paying any closing costs to the mortgage lender or professionals.
How to Maintain Family Relationships During the Homebuying Process
While each family is different, your priority should be preserving a good relationship when purchasing a property from a family member. Open communication and transparency throughout the process are essential. Aim to create a situation that benefits both buyer and seller, so the family member feels you’re advocating for them. Remember to keep personal and financial matters separate to maintain healthy family relationships.
Advantages of Buying a House from a Family Member
Buying a house from a family member has significant advantages. Here are some key benefits that can make this a good option.
Familiarity and Trust
Buying a house from a family member can provide a sense of trust and familiarity, as both parties likely have an existing relationship and history. This trust can mean both buyer and seller benefits. As the buyer, there’s comfort in knowing that the family member selling is working in your best interests.
Potential Cost Savings
Family members are more willing to negotiate on the price, which can lead to cost savings on the house, compared to buying from a stranger. You could benefit from having first shot at purchasing a highly sought-after property or an under-market value price.
Easier Negotiation Process
As you’re often both willing to help the other, it can make negotiating more like problem-solving together. The negotiation process with a family member may be more flexible and less formal, making it easier to come to mutually agreeable terms.
Risk and Limitations of Buying a House From a Family Member
Some significant risks are associated with buying a house from a family member. Here’s what you should consider.
Emotional Considerations
Even if the relationship is good, when money is involved, there can be disagreements. Purchasing a house from a family member can sometimes lead to emotional complexities and strain on relationships if disagreements or conflicts arise during the process.
Lack of Objectivity
Because of the existing relationship, it may be challenging to objectively approach the transaction and negotiate on terms solely in the buyer’s best interest. That lack of objectivity and desire to help the family can actually mean you spend more on the property than purchasing from a stranger.
Limited Options
Buying from a family member may limit the buyer’s options, as they may have fewer options for finding the specific type, location or features they desire in a home. If this is an issue, remember you’re not locked into purchasing a home from a family member.
Buying From a Family Member
Keeping it within the family can be a great way to purchase a home. You’ll be able to preserve the sentimetal value, and you won’t have to fend off the competition. You could enjoy lower costs, easy closing and potential gifts. Approached carefully, both the buyer and the seller could benefit. Ready to purchase a second property? Learn more about real estate investing or research housing loan options here.
Frequently Asked Questions
How long does the process of buying a house from a family member typically take?
While the closing process may be simpler, if you’re applying for a mortgage, it can still take one to two months to close when purchasing a home from a family member.
Do I need a title search and title insurance when purchasing a house from a family member?
Yes, you still need a title search and title insurance when purchasing a house from a family member.
Are there tax implications when buying a house from a family member?
Yes, there can be tax implications when buying a house from a family member. If the buyer received a gift of equity, the seller may have to file a gift tax receipt with the IRS. Likewise, the seller may have to pay capital gains tax. You can speak with a CPA about tax implications for your situation.
The post How to Buy a House From a Family Member by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.
