Do you want to learn how to buy a family member’s house? Here is everything you need to know
Updated 10-27-2023
You could be forgiven for any reluctance you might feel to enter the housing market. Depending especially on where you live—or want to live—it can be undeniably tough out there. While there are many options available to find the right mortgage for you, and the right home, another alternative may exist right under your nose.
That alternative? Buying a family member’s house.
You must be aware of how to negotiate to seal the deal in the most harmonious way possible. In this article, we will outline how to buy a family member’s house. We will also look at buying your parents’ home for $1 and look at the pros and cons.
Here is everything you need to know about how to buy a family member’s house.
How to buy a family member’s house: the basics
Buying a family member’s house differs from buying a house from someone you don’t know. One of the first things you must consider whether you are a first-time buyer or not, is how such a significant deal can impact familial relationships. It may have no effect at all, but it is important to be sensitive to it.
You can also decide together not to hire a real estate agent, keeping the negotiations and the plans within the family. If you opt to move forward without a real estate agent, you will want regular check-ins to make sure all parties feel good about moving forward.
In this section, let’s look at the basic steps to determine how to buy a family members house:
- Discuss expectations
- Use documentation
- Understand non-arm's length transactions
- Assess your mortgage
- Settle on a price
- Consider a gift of equity
- Research the home-buying process
- Get an inspection
While this may feel like a lot of steps—don’t worry. Most of the steps are short and easy to do. Remember: open communication is the name of the game.
Let’s take a closer look at each of the steps on how to buy a family member’s house.
1. Discuss expectations
No matter how communicative your family is, it is especially important to be open when discussing expectations in real estate transactions. Discussing expectations should be among the first steps when buying a family member’s house. Here are some topics you will want to discuss before getting too far into the buying process:
- What is the cost?
- When will the sale happen?
- How will moving work?
- Whether your parents want to remain in the home, either part-time or full-time
2. Use documentation
It may feel silly to draw up an overly formal contract with your parents. If it does get complicated, however, the right paperwork can make a huge difference.
After working together to determine what you all want and expect, you can then put it into writing. Even if everything runs smoothly, you can use the documentation to see everything clearly in front of you. It may even be a good point of reference later. It will also likely come in handy for external sources like your lender.
3. Understand non-arm's length transactions
Essential to buying a family member’s house is the non-arm's length transaction. When you buy a home from a stranger—which is the more common route, we’ll say—it is considered an arm’s length transaction. Why? Because the parties involved are not connected and can look out for their own interests without any entanglements.
A non-arm's length transaction, on the other hand, is also referred to as an identity of interest. When dealing with a family member, however, your choices can be influenced by another person. It is important, therefore, to fully understand the legal implications of that relationship.
4. Assess your mortgage
Are your parents still paying off the mortgage? Do they fully own their house? How up to date are the payments? At this point in the process, you will want to ensure you know where you stand and how you will assume financial responsibility for the property.
Here are a few ways to assess the mortgage:
- Your parents own the house outright, meaning you can take out a new mortgage or buy it with cash
- The mortgage has yet to be paid off, but the loan is assumable. This means you can take it from your parents and start making payments where they left off
- The mortgage is not assumable and has yet to be paid off. In this case, you can attempt to contact the mortgage lender to inquire about a transfer. Keep in mind, however, that you might need to start from scratch on a new home loan
Lenders have different rules. Find out how your lender deals with non-arm's length transactions and all other unique aspects of family-to-family sales.
Did you know that there are ways to buy a house without a mortgage? Explore your options – one of them might work for you.
5. Settle on a price
Conduct your own research before settling on the actual sales price for the property. Here are some steps to keep in mind during this part of the process:
- An appraisal will help you determine the market value. And, if you mortgage the property, it will likely be a requirement.
- To better understand what similar homes cost, you can also look at real estate comps. That is if you decide to forgo using a real estate agent.
- Home sellers should consider if/how much they want to discount the sales price.
- Ensure all involved know of any possible tax implications.
6. Consider a gift of equity
A gift of equity is essentially a discount on the home’s sale price. When purchasing a property from your parents, they can pay some or all of your down payment by selling the house to you for that much less. This can be a major help. Why? Because down payments are one of the most significant barriers to home ownership.
7. Research the home-buying process
If you forgo a real estate agent, you forgo their legal knowledge and assistance. This means you will have to understand what it’s like to purchase a property for sale by the owner. You must also learn all the steps involved in the home-buying process.
8. Get an inspection
Finally, you should get an inspection, even if you know the home well and your parents do not know of any issues. It will be worth your while—if only for peace of mind—to have a professional assess what may not be visible to you.
Mold is a good example of something unseen that would be uncovered by an inspection. Getting the home inspected is a good way to avoid any unpleasant surprises.
Can I buy my parents' house for $1?
The short answer is yes, you can buy your parents’ house for $1. However, the significance of that $1 is primarily symbolic. Whether it is the best decision for you and your family financially is a different matter. Before agreeing to buy your parents’ house for $1, you should consult with an attorney, a real estate agent, or an accountant.
Your parents can simply give you the house outright. Doing so carries the same ownership and tax implications. And in either case, your parents are making a gift. While some may think selling a home for $1 is binding, whether you sell for $1 or give as a complete gift, both are valid transfers.
When determining how to buy a family member’s house, remember one of the benefits is keeping the property in the family for the next generation.
Is it smart to buy a house with a family member?
Buying a family member’s house can be a great idea if all parties involved are financially prepared and responsible. However, there are definitely pros and cons that you will want to consider. Let’s take a look at the potential risks and benefits of buying a family member’s house.
The pros
The pros of buying a family member’s house are somewhat more obvious, but are worth exploring, if only as a reminder. If done correctly, there are usually financial benefits for both homebuyer and home seller, including:
- Flexible, casual relationship between buyer and seller
- Keeps the property in the family for the next generation
- Lower closing costs
- Low or no down payment
- Lower sales price
- No real estate agent commissions
Remember: the amount you pay depends on the arrangement you and your family make. While not required, most parents discount the price when selling to their children based on money saved during the process.
The cons
While the list of cons is noticeably shorter, the risks may be significant and are worth careful consideration. The risks to buying a family member’s house may include:
- Potential tax issues
- Risk of family conflict
- You might still require traditional financing (which may get complicated if your family still has a mortgage on the property)
How to buy a family member’s house: closing thoughts
There are many considerations you and your family need to make when figuring out how to buy a family member’s house.
A good thing to remember from the start is that communication is key. If all family members involved are aware of expectations and are financially responsible, then the process will likely run smoothly. However, there are risks involved—and it’s important to know them ahead of time so that you can avoid them.
To find out more about how to buy a family member’s house, get in touch with one of the mortgage professionals we highlight in our Best in Mortgage section. Here you will find the top-performing mortgage professionals across the USA.
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