When you have a parent, sibling, or another family member who is planning to move, you may be able to be first in line to buy their home. Plus, they may even offer you a price below market value to help you out, especially because they will not be paying a hefty commission to a real estate agent. It sounds like a great idea on the surface, but remember that buying a home is a huge financial transaction. It will be important that you follow some specific guidelines to ensure that the purchase goes through smoothly and you are both protected legally from future repercussions.
How to structure the purchase
Your first step is to agree on a purchase price for the home. Keep in mind that if you pay less than fair market value for the home, you could be stuck with big capital gains taxes if you sell it again too soon. In addition, your family member may trigger a tax audit if the discount is too steep. One way to structure the purchase is to get a third-party appraisal to determine the fair market value, then agree on a purchase price close to that amount. Your family member can then offer to pay all of the closing costs to help give you a discount, if they want to.
Before proceeding, get a home inspection so you have a complete understanding of the condition of the home. Even if you have spent much time there, the house may have structural or system issues of which you are unaware. Your family member who is selling it may not be aware of them either. An independent home inspector can provide a thorough assessment of the home's condition and bring to your attention any existing issues. If needed, you and your family member can renegotiate your deal based on the findings of the inspection.
Obtaining financing to purchase a home from a family member
Your family member might offer to finance the purchase for you, meaning that you would make payments to them rather than to a bank. While this might sound like a good idea, it can complicate your relationship if you fall behind on payments. Doing so would leave your family member in the tough spot of having to decide whether to pursue foreclosure or to let it slide.
The best option is for you to obtain financing through a traditional lender. With interest rates as low as they have been lately, it is a small sacrifice to help preserve family relationships. Get pre-qualified for the mortgage before your family member hires any legal help for the transaction, just to ensure that your credit score and income are sufficient. When you apply for your mortgage, you should also disclose that this is a sale between family members.
Proper documentation for a real estate transaction between family members
Buying a home is a legal transaction, and you must ensure that the documentation is properly completed. If not, you could run into problems with ownership claims down the road. Manage documentation with the help of two professionals:
- A real estate attorney can help you write a purchase contract that specifies the price and additional items (like appliances, curtains, furniture, or personal effects) included in the sale. The attorney will charge a flat fee that is much lower than a typical real estate agent commission.
- A title company can perform a title search to ensure that the ownership chain is clear and issue title insurance to your lender. The title company will also take care of completing the financial transaction and filing all of the appropriate paperwork with local agencies.