Sometimes, home sweet home is right under our noses. Buying a house from a relative may be the perfect solution, but everyone should be aware of how to negotiate and seal the deal.
An adult child may have her heart set on buying her parents’ home because of the memories it holds. Another might want to purchase Grandma’s home so he can retire in Florida. Others may have a relative who wants to give them a good deal.
Whatever the case, if you’re buying a house from family, you’ll want a harmonious handoff.
Key Points
• Buying a house from a family member involves unique considerations, including the potential impact on relationships and the importance of clear communication.
• Professional assistance from lawyers or real estate agents is advisable to ensure legalities and fair market value are respected.
• Determining a fair purchase price can involve appraisals and should reflect the home’s market value unless a gift of equity is involved.
• Non-arm’s-length transactions, like those with family, often face greater scrutiny to prevent fraud and ensure fair dealings.
• Understanding the implications of gifts of equity and potential tax consequences is crucial for both parties in the transaction.
Buying a House From a Relative
It’s important to understand the home buying process before making any real estate purchase.
And knowing what is needed to buy a home is useful before, erm, buying a home.
Buying a house from family, though, is a bit different than a deal between strangers. First of all, whether you’re a first-time homebuyer or not, it’s important to consider how crafting the deal can affect familial relationships.
Not hiring real estate agents might keep negotiations and planning all in the … family. If that’s the case, it’s a good idea to have regular check-ins to ensure that both parties feel good about the next steps and are ready to move forward.
It can be helpful to take notes about the arrangement after an initial meeting and make a copy for everyone involved so that all important details are in writing and available for review. That way, everyone is clear on what is expected of them.
Do We Need Real Estate Agents and Other Pros?
Even though buying a house from family is a personal affair, it can be helpful to bring in professionals to make sure the process goes smoothly, everything is done legally, and both parties walk away feeling satisfied and respected.
A lawyer or real estate agent can help make sure the purchase contract is done properly, state-required property disclosures are made, and the house sells for fair market value — what the property would sell for on the open market.
A title company can protect the buyer from any liens and ensure that no one else has a claim on the home. Even with a high level of trust between family members, this can be a smart step to take to protect the buyer.
And it can be helpful to consult a tax professional in order to be aware of any tax implications of the agreement.
Determine the Purchase Price
Deciding on the fair market value can be done by reviewing comps or hiring an appraiser to conduct an objective property valuation. Keep in mind that lenders usually require an appraisal.
Once both parties have an idea of the market value, they can decide how much the buyer will pay. In some cases, this will be the fair market value. In other scenarios, a family member may offer to pay closing costs, or provide a cash gift or gift of equity (described below).
Draw Up the Purchase Agreement
When both parties are ready to move forward, it’s time to draw up a purchase agreement. The legally binding real estate purchase contract will outline the price and payment terms.
Buyers who need a home loan can send the contract to their lender when applying for a mortgage.
Prepare for Scrutiny
There are two main types of real estate transactions: arm’s length and non-arm’s length.
In an arm’s-length transaction, the buyer and seller do not have a relationship and are acting in their own self-interest.
When someone buys a home from a family member, it’s a non-arm’s-length transaction. These deals may be subject to more scrutiny because the chance of mortgage fraud increases.
The sale price of the home must equate to what it would be between strangers unless a gift of equity is on the table.
A heads-up for anyone whose elder family member needs to go to an assisted living facility or nursing home and plans to fund their stay with Medicaid: To prevent Medicaid applicants from simply giving away a home or other resources to qualify for the low-income medical program, the federal government has a “look-back period” of five years (the exception is California, which has a 2.5-year look-back period). A Medicaid applicant is penalized if assets were gifted or sold for less than fair market value during that time.
Know How the Gift of Equity Works
One thing sellers may want to consider is giving the relative a gift of equity, or selling for less than fair market value.
The maximum amount of the discount without reporting it as a gift to the IRS is $16,000 per recipient in 2022.
Spouses “splitting” gifts may contribute $32,000 a year. Spouses splitting gifts must always report the gift.
That doesn’t mean sellers have to pay a gift tax; they can apply it to their lifetime gift exclusion. The lifetime gift and estate tax exemption is $12.06 million, or $24.12 million for a couple, in 2022.
So for the vast majority of people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. Homeownership in general helps build generational wealth.
Here’s another plus for buyers: Most lenders allow the gift to count as a down payment.
A lender will require a gift letter signed by the sellers for a cash gift or a gift of equity sale. The letter will confirm that the gift is not a loan.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Know How to Finance the Home
When buying a home from a family member, many buyers will still need to take out a home loan. Even with a discount or a special offer from a family member, it can be hard to purchase a home outright.
Go with a mortgage broker or direct lender? Each has pluses and minuses.
Any mortgage loan officer or broker should be willing to answer your mortgage questions, including those about fees, points, and mortgage insurance.
Weighing different types of mortgage loans (including conventional conforming mortgages, jumbo loans, and government-backed loans) and loan terms (usually 30 years) can help you make a more informed decision.
After applying for mortgages, you’ll receive loan estimates. It’s important to compare mortgage APRs, fees, and closing costs.
After you choose a mortgage and close on the home, your mortgage servicing outfit will handle your payments.
The Takeaway
How to buy a house from a family member? For starters, consider calling in professionals and understand the gift of equity. Buying a house from a relative can be seamless.
As you shop for a mortgage, see what SoFi offers. Why SoFi? Because the terms are flexible, the down payments are low, the closing time is guaranteed, and the rates are competitive.
Get a rate quote in just minutes.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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