Important takeouts:
Buying a home from a family is considered a non-arm length trade. In other words, buyers and sellers have existing relationships. It helps save agent fees, offer potential for stock gifts, and reduce or eliminate down payments. Just because a seller knows it doesn’t mean that you shouldn’t treat it like a transaction. Do not skip discussions about important details such as inspections and finances.
On weekly calls with parents, you will find that they are planning to sell your childhood home in Redmond, Washington. The next move from an apartment in Seattle was to rent a Bellevue, Washington rental, but suddenly, nostalgia began. What if you buy a house instead?
Buying a home from a family can mean better prices and hassle, but it’s important to recognize potential pitfalls and follow certain guidelines. This Redfin article will cover all the pros, cons and essential details to consider.
Understanding arm length and non-arm length transactions
Most real estate transactions are arm length. In other words, buyers and sellers have no previous relationships and are acting in their own interests.
When you buy a house from family, friends, or even co-workers, you have a personal relationship with the seller. This is known as a non-arm length trade. In these cases, buyers and sellers work together to help each other.
Non-arm length transactions are useful, especially when buying your first home, but these transactions often attract more rigorous scrutiny from lenders, and often require careful attention and care to ensure that they are done correctly.
The advantages of buying a house from a family
Buying a home from a relative offers perks such as reduced stress and potential savings. Here’s why this makes it such a great option:
Friendliness: From childhood memories to layouts, quirks and neighborhoods, you can settle for a seamless postmaube by buying a familiar home. You will spend less time on adjustments and more time to make it yourself. Trust in the Seller: Knowing who is buying gives you a lot of peace of mind. Typically there is more transparency about the value and condition of the home, and there is less worry about price bulging. Equity Gift: The house must be sold at fair market value, but your family can offer a fair gift to make it affordable. A fair gift is the difference between fair market value and selling price. This requires additional documents, such as an official gift letter. Reducing closure costs: You don’t need a real estate agent to buy a home from a family. This means you don’t have to pay the Real Estate Board. Improved flexibility: Families are usually willing to be more flexible with moveout dates, closure timelines, and other logistics. They may even be able to help each other during the transition.
Purchase from family: Sample scenario
Let’s say your parents’ house is worth $500,000, but they agree to sell it for $400,000. That $100,000 difference is a fair gift and can usually be applied to a down payment, reducing the amount you need to save or borrow.
Plus, since you’re buying from your family, you may not be using a real estate agent, saving you from 2% to 5% in fees. With a $400,000 sale, that could mean saving about $20,000 on closing costs. Additionally, you and your parents can agree to flexible deadlines that work for both you, making the process more smooth.
The disadvantages of buying a house from a family
Just like any other big decision, weigh potential drawbacks along with benefits. Here are some important issues to discuss with your family and be aware of during the process.
Higher Scrutiny: Non-arm length transactions are at a higher risk of mortgage fraud, so lenders must take additional precautions to protect themselves and the parties. Follow all rules and regulations for non-arm length transactions to avoid lender scrutiny and other potential issues. Tax Impact: Large stock gifts must be reported to the IRS, which can cause a large gift tax. Talk to your financial advisor to understand your options. Family tension: Letting go of family homes is emotional. Expect unsolicited advice and disagreements regarding the change and clarify whether the stock gift needs to be repaid. Make sure to obtain all contracts in writing.
How to buy a house from a relative
While you don’t need to worry about many of the typical steps in the home buying process, such as finding a real estate agent or a home hunt, there are a few steps to follow:
You’ll be approved in advance for a mortgage: start by understanding how much you can get and show off your lender, where you’re a serious buyer. Have an honest conversation: Before moving forward, sit with your family and discuss your expectations, including price range, current mortgage status, required repairs, and escape timeline. Make sure you are all together to avoid surprises and tensions. Find something that your home is worth and agree to the price. Find the value of your home using online quotes and order a professional home rating for accurate fair market value. This is necessary if you are applying for a mortgage or using a gift of stock. Hire a Real Estate Attorney (optional but recommended): The attorney guides you through the legal and tax complexities of purchasing from a relative and ensures that the transaction is well documented. Some states may require one when closed. Create a Purchase Agreement: Create a legally binding agreement that outlines the terms and conditions you discussed with your relatives. You should consider hiring an expert to help draft documents and make sure you and your relatives understand it before signing anything. Connecting with mortgage lenders: The lender will assess your finances, confirm your valuation and fairness gifts, and undertake your loan application. Expect more meticulous reviews for your family connections. Get home inspection and title check: Since you buy a home from a family, home inspections aren’t as important as when you buy from a stranger. However, it remains important to inspect your home for potential issues that relatives may not be aware of. Checking the title to ensure there are no property liens or judgments will also provide peace of mind. Close your new home: Once the final document has been signed and the title has your name, you are ready to get the key and move to your new home.
FAQs about buying a house from a family
Can I buy a home from a family member who doesn’t have a mortgage?
If you can buy a relative’s home with cash, you don’t need a mortgage to buy the home.
What is a fair gift? How does it work?
The gift of stock equals the difference between the fair market price and the purchase price of a home. This can often be directed towards or replaced by a down payment. When purchasing a family home, you must submit a home evaluation and a formal gift letter to the lender.
You can avoid paying private mortgage insurance (PMI) if the total gift of stock equals more than 20% of the home’s purchase price. Depending on the amount of talented stock, the seller must submit a gift tax form.
Do you still need a real estate agent?
You don’t need a real estate agent when buying a home from a family, but it can help throughout the process. If you and your relatives don’t want to navigate this yourself, the agent will help you determine the purchase price, draft a document, and more to make your purchase easier. However, you will no longer save on fee costs.
Can I skip ratings and home inspections?
Lenders often require an evaluation and a home inspection to purchase non-arm lengths. If the gift of fairness is involved, an evaluation is required. And while you may trust your relatives to take care of your home, the inspection can ensure there are no hidden issues they don’t know about.
Streamline the process of preparing for everything
Buying a home from a family member not only simplifies the home buying process, but can also save you money with down payments and closing costs. There are several important aspects that take into account tax implications and limitations on non-arm length transactions, but discussing the possibility of buying a relative home is a great way to infiltrate your home. Make sure you communicate clearly and work with experts to ensure you get the job done correctly.
