For most people, buying a home is one of the most important decisions they will make in life. Getting a new house gives you the satisfaction no other purchase could ever bring. However, while the closing experience is fun, the long processes before it can be stressful. What with all the trips you have to make searching for the perfect house, dealing with lenders, authorities, bargaining, uncertainties, and paperwork.
Buying a house from a family member is a different ballgame. While the paperwork and other formalities remain the same, the uncertainties are significantly less.
You are probably familiar with the house, so you have a pretty good idea of what you are getting yourself into. Moreover, unlike is the case with a real estate agent, a family member is less likely to give you a marked-up price or ignore important details to make a sale.
Thinking of purchasing a home from a family member? Here are some of the things you need to keep in mind before you take the next steps:
Rules to Follow When Buying a Home from a Family Member
In real estate, this type of transaction is referred to as non-arm’s length transaction. As the name suggests, this is a transaction between parties who have something in common and aren’t necessarily engaged in it for self-interest to make a profit.
While family transactions are generally smooth, they are also prone to fraud or omissions that could lead to violations of various rules. For instance, overvaluing a house might attract tax questions or lawsuits from family members or mortgage providers.
Keep in mind that selling a house to a family member attracts the same taxes you could have paid if you sold to an external buyer on a profit.
Huddles to Jump When Buying a House from a Family Member
1. Avoiding Conflict
Depending on your relationship with the seller, things can get ugly along the way if you don’t follow the rules. For instance, a family member might find it easy to lie or hide important details because of mutual trust. The person could have used the house as collateral for a loan and fail to mention it or worse, be delinquent on their mortgage.
Avoid such conflicts by involving a third party to take care of the formal arrangements, fact-checking, and paperwork. This is especially important if you are going for a cash purchase. Formal arrangements also protect you in case there is family strife or if the person decides not to sell and wants to reoccupy the house.
2. Handling Lender Apprehension
Getting a mortgage approval when the transaction is between relatives can be difficult. This is usually due to issues like vested interest, mortgage fraud/collusion, and other uncertainties that attract scrutiny from underwriters and regulators. The parties involved in financing your purchase will want to see proof of the house’s true value, the mortgage repayment status of the current owner, and other details.
However, things can move faster if you have your paperwork in order or if you engage the same lender that was servicing the existing mortgage.
3. Valuing/ Setting the Price
When buying from a family member, you have to come up with a price on your own, unless you engage an external valuer. This could either be a curse or a blessing, depending on your situation and relationship with the family member. Seek help from a third party if you have doubts about the house’s value.
Advantages of Buying from A Family Member
Despite the challenges, buying a house from someone you are related to is better than from a stranger or agent. Here are some benefits of buying from a family member.
1. Lower Costs
From closing costs to commissions, transport costs to repairs, legal fees to agent fees, these are some of the costs you might not incur when buying from a family member. Real estate agents often add their commission on the selling price. Some realtors may also charge you for other things when you make an offer.
A close family member might choose to lower the price of the house and record the deducted amount as a gift of equity. This transaction is common where parents are selling their house to their children. In the case of a mortgage, the deducted amount can be recorded as a down payment.
Since you will be buying the house from a family member, there is little chance of being swindled or overcharged. The family member will be more forthcoming about the issues that the house might have.
All in all, buying a house from a family member is fine, as long as you follow what the law stipulates and trust the other party. All you need is to get pre-approved for a mortgage, the price of the home, and get the purchase agreement written.