Buying a home is a tricky, complicated, expensive, draining and stressful process. Okay, not always, but it definitely can be. One seemingly easy way out would be to buy a home from a family member or friend. You’d get a lower price, a quicker process, potential for owner financing, and wouldn’t it be much easier to deal with someone you already have a great relationship with? You wouldn’t even need a real estate agent!
Whoa. Slow your roll there.
Buying a home from someone you know might be a great idea, but there are a number of things you need to know before you can pop the cork in your new digs.
Arm’s Length Transactions
Real estate transactions can be broken down into two broad categories: arm’s length transactions and non-arm’s length transactions. The first type is a deal between complete strangers while the second is a deal with someone you have some kind of relationship with, whether professional or personal.
While you can buy a home in either kind of transaction, there are a lot more rules if you’re buying from someone you already know. There are a few things lenders want to guard against in family deals, and some of them are for your own benefit, even if it doesn’t seem like it.
Because the water can be so easily muddied with family or friend transactions, there are more government and individual lender guidelines to follow when trying to get a mortgage for a home. Lenders want to ensure both the buyer and seller are acting in their own self-interest, not under any duress, are agreeing on a price that is close to the market value and aren’t engaging in mortgage fraud including misrepresentation, straw buyers, inflated prices, etc.
In a short sale, for example, an arm’s length affidavit must be signed to protect against a family member buying the home but allowing the owner to stay in the home for a greatly reduced mortgage cost.
To Buy or Not to Buy
There are a lot of potential benefits to buying a home from a friend or relative, but mixing business and family can be a sticky business.
Other family members can become jealous or the seller’s financial situation can suddenly change, moving them to ask you for more money, especially if they provided the loan for you instead of a mortgage lender. While there are many very nice people in our lives, money is something that can easily make people turn mean fast.
You’re also going to risk running into more obstacles with getting a loan because of all the added restrictions, and you may be subject to extra taxes because the IRS will be watching closely to make sure a fair market value – and interest amount – is paid for the home. If you buy the home at a cheaper price and then sell it within a few years, you may be subject to capital gains taxes as well.
These can be some tender subjects, but if you’re buying a home, you have to know everything about it, whether you know and trust the seller or not.
- Make sure the family member is current with their mortgage payments because it could impact your mortgage approval if they’re not.
- Work with a title company to protect yourself from any other liens that might be on the property. Many title companies have for sale by owner (FSBO) teams that can help you a lot when you’re not using a real estate agent.
- Get legal advice. Don’t worry about offending your relative or friend – this isn’t because you don’t trust them, but because you aren’t well-versed in the legal aspects of purchasing a home. An attorney can help you with all of the paperwork and make sure you don’t inadvertently commit mortgage fraud.
Buying a home from a friend or relative can seem like a great way to simplify moving into a new home – and it can be. But it’s important to understand how the process works and the potential risks involved. If you have questions or comments about any of this, let us know in the comments!