People buy and sell homes on a daily basis — and sometimes to and from their own family members. There are a variety of reasons and different ways that family members can ‘gift’ or sell a house. Whether it be a gift of equity, covering the down payment, or a discounted price, there are many ways to sell or buy a home within a family.
You may be wondering the steps it takes to sell or buy a house from a relative. Whether it is you doing the buying or selling, or if you’re doing research for someone else’s, this article talks about just that. We will discuss the different types of transactions, the steps, and then weigh the pros and cons for you.
Arm’s Length Transaction vs. Non-Arm’s Length Transaction
When it comes to real estate, there are two categories of transactions — arm’s length transactions and non-arm’s length transactions. And it all comes down to the relationship between the buyer and the seller.
An arm’s length transaction is your typical real estate transaction. There is no professional or personal relationship between the two parties and each side acts with their own best interest in mind. Person A has a house to sell and Person B has a house to buy. Deal closed.
A non-arm’s length transaction is when the buyer and the seller have a personal relationship. This could mean friends, family, business partners, etc. Personal and self-interest are not always the goal in these transactions. However, it almost seems too good to be true, right?
While a non-arm’s length transaction is legal, there is a lot both parties have to do in order to get to the final goal of buying and selling. This is because there is a lot of fraud concerning these transactions, which could mean tanking the local housing market, inflating the price to cheat the seller out of money, orother sortst of misrepresentation. Lenders have to abide by the government regulations and guidelines to protect themselves and the parties involved. Some lending institutions may have their own rules regarding non-arm’s length transactions, so be sure to check with your institution before continuing through the process.
Steps on buying a house from family members
1. Get pre-approved.
2. Decide the purchase price.
3. Title history and legal representation
4. Complete purchase agreement
5. Underwriting and closing
After all of that is done, then the loan gets processed by the lending agency. This is a good idea to avoid large purchases and activities that will poke holes in the credit score. This helps to get a better interest rate. Upon approval, the closing is done and the house now belongs to the buyer!
Pros and cons of buying a house from a family member
It boils down to this — time and convenience. When buying a home from a family member (or selling, in some cases), there is a lot of energy saved in the process because a lot of the stress is non-existent.
- Cheaper closing costs or down payment: There is no real estate agent involved, which can save the seller commission fees. For the buyer, gifts of equity or cash gifts can be put towards a down payment. Everyone wins!
- No hunting: The buyer does not have to find a house, which can be one of the most stressful steps in home buying. And it helps the seller too! Because the seller doesn’t have to hunt for a buyer and can go into a new place with no contingency.
- Stays in the family: For some people, the land and the home are treasured heirlooms. Or, if the house is in a historical section of town, you can be assured that it will be taken care of. Sometimes it is nice to know that the place you call home is going to be loved as you loved it.
- Flexibility: There is some flexibility with moving, which can be nice. It allows both parties to pack and gives the seller time to find a new place. Not to mention, it is way less of a hassle to try to meet during a certain time frame on a weekday.
There are some disadvantages as well, which is the case with every type of agreement. When it comes to family, there can be a lot of personal life drama that can ruin a deal. Knowing the pitfalls of a non-arm’s length transaction is important, and perhaps you can avoid them.
- More hoops and restrictions: There are more hoops to jump through and more restrictions, and these can vary by lending institution and situation. But there is often a bit more legwork done by the buyer and seller than is usually done by the real estate agent.
- Tax implications: Gifts of equity or other large monetary gifts have to be claimed on tax returns. And sometimes, even the buyer has to claim it as well. Be sure to talk to a tax expert to be sure all things are accounted for.
- Strife: Large and stressful processes like moving can make or break a family. Not to mention, some other family members may feel strongly about the transaction and will put in their two cents. It is good to set boundaries beforehand. And if you think this process might further damage an already fragile relationship, then it may be wise not to go through with it.
- Not a done deal: Sometimes, the buyer may have to back out of the deal, or the seller has to increase the price. These things are very real in the traditional real estate process, and non-arm’s length transactions are not immune.
Now you know all that goes into buying a house from a family member. If it sounds like the process is a good fit for your situation, then all the better! But if there are some hesitations yet, be sure to communicate that with your relatives. The process can be very smooth compared to normal transactions, but this can also be a more emotional process. In the end, it is best to be patient with everyone and work together to achieve the desired result.
Are you ready to start the home buying journey? Reach out to the home buying specialists at Hero Home Programs. They have been helping homebuyers save thousands on their home purchase and look forward to serving you too.