Considering buying property from a family member? Here’s your simple yet complete guide on how to buy a house from a family member: step-by-step.
Firstly, you’ll be glad to know that it can be a great decision – as there are a lot of advantages that buying property from family brings to the table.
It can be cheaper, for one, as well as faster, less complicated, and less stressful.
After all, you can skip the house hunting process and start dealing with someone you know. Better yet if you have a good relationship with this person!
Still, it’s important to go through the buying process properly. Here’s how in a straightforward guide that’ll tell you everything you need to know.
The Pros And Cons Of Buying A House From A Family Member
Let’s start with the advantages and disadvantages of buying a house from a family member.
This is worth looking at as you want to know what you’re getting into first, as well as how buying property from a family member stacks up against buying property traditionally.
The good news here is that the pros generally outweigh the cons.
The Pros Of Buying A House From A Family Member
- You won’t need to shop around for houses. An obvious advantage that saves time because you already have your sights set on a house.
- You might not need a mortgage loan. Should your family member agree to provide financing, you won’t need to apply for a mortgage.
- You might have a lower down payment. Again, this can be formally agreed with your family member, which can be lower if, for example, settled as a gift of equity.
- You don’t need to use a real estate agent. Through a FSBO (for-sale-by-owner) transaction, it’s possible to complete the sale without a real estate agent, saving you money.
- You can bypass home inspection. Provided you trust the family member who’s selling it to you or have a good idea of the condition of the house.
- Negotiation can be less formal and more flexible. Perhaps the best advantage here – that negotiating with a family member can be easier than dealing with a seller who’ll be looking to get the best deal at their end.
The Cons Of Buying A House From A Family Member
- You still need to go through legal formalities. This includes the necessary documentation and hiring an attorney to review the full agreement to avoid possible issues and conflict.
- You might still need traditional financing. You’ll still have to apply for a mortgage loan if you need it and also go through the process of assuming the payments if your family member’s mortgage is not yet paid off.
- You can run into tax problems. If you’re buying the house for a lot less than market value or receiving a gift of equity, the IRA can get involved – especially since the sale will be a non-arm’s length transaction.
Arm’s Length Transaction VS Non-Arm’s Length Transaction
We mentioned it above, so what is a non-arm’s length transaction? And what’s the difference between an arm’s length transaction and a non-arm’s length transaction?
Thankfully, understanding the two terms is straightforward.
An arm’s length transaction is a sale between a buyer and seller with no personal relationship, i.e. strangers.
A non-arm’s length transaction, on the other hand, is a sale between a buyer and seller who have a personal relationship – such as relatives and friends.
So buying a house from a family member is classed a non-arm’s length transaction, and the main difference in this case is that negotiations are less formal and often more flexible – especially if you and your family member are inclined to help each other out!
What To Consider Before You Buy Property From A Family Member
Before we get into the steps to buy a house from a family member, there are a few things worth considering first.
These include the market value of the house (getting a house appraisal and consulting real estate comps if desired), the asking price, when the sale can take place, and the moving process for both parties.
It’s also worth knowing whether your family member owns the house outright or is still paying the mortgage. If it’s the latter, you’ll need to find out from the lender if the loan is assumable (to take over the remaining payments) or if you’ll need to start a new mortgage.
Don’t forget that tax laws still apply to non-arm’s length transactions. So take into account the asking price against the house’s market value, as well as any gifts of equity (such as a lower down payment) your family member is willing to agree to.
How To Buy A House From A Family Member: Step-By-Step
Now that you know the pros and cons and what to consider, let’s go through what the process entails of buying a house from a family member.
It’s not as complicated as you might think, as below you’ll find it broken down into five simple steps.
1. Get Preapproved For A Mortgage Loan
The first step is ensuring you meet the requirements for financing, which means getting preapproved for a mortgage loan. This process involves a credit check and an assessment of income and potential down payment.
Optional: Pay for a Home Inspection
Here’s an optional step you can take for added peace of mind: paying for a home inspection. Getting a home inspection of the house provides a professional assessment of its condition, including repairs that may need attention now or in the future.
2. Settle On A Price
The next step is to consider the market value of the house and any gifts of equity (lower down payment, cash gifts, agreed closing fees, etc.) your family member is willing to agree to, before both agreeing on a price that you will buy the house for.
3. Get A Formal Sales Agreement
The third step is to get a sales agreement written up, which will require the help of a real estate agent or attorney for both parties. This will put the final price, any contingencies, and all legal responsibilities in formal writing.
4. Finalize The Financing Terms
The fourth step is getting the financing of the house finalized, which involves a full review of the agreement, all necessary documentation, the lending risks, and the rates and terms of the loan you’ll receive.
Once financing is agreed and approved, all legal documentation has been signed, and the house title is ready to be transferred to your name, you can breathe a sigh of relief and start looking forward to moving in!
Frequently Asked Questions
Is It Easier To Buy A House From Family?
It can be much easier to buy a house from a family member (especially if you are close with them), as negotiating the price, terms, and move-in date will typically be less formal and more flexible than buying from a seller who will aim to get the best deal for their house.
Do I Need A Solicitor To Buy A House From Family?
Getting a solicitor to oversee or review the legal side of buying a house from a family member is generally recommended. This will ensure the sale is carried out professionally and legally to avoid contingencies with payments, taxes, and agreement terms.
Should You Buy A House From A Family Member?
Buying a house from a family member can offer more advantages over buying a house traditionally. Negotiating can be easier and you may even save money with financing, the initial down payment, and costs associated with real estate agents and home inspectors.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.