If handled properly, selling a house to a family member can be a good way to help a loved one save money to buy a home and build wealth. But an off-market transaction between family members requires careful planning and transparent communication to avoid misunderstandings and ensure a smooth process.
Why would it be any different if you were selling to a family member?
Selling your home to a family member is called a controlled transaction, while selling your home on the open market is called an arm’s length transaction.
Arm’s length transactions occur between strangers, each acting in their own financial interest. The majority of real estate transactions fall into this category, with buyer and seller agents typically hired to negotiate on each party’s behalf.
In a admin transaction, there is an established relationship between the buyer and seller. Administrative transactions may be subject to increased IRS scrutiny, especially if the property is sold for less than fair market value. However, they may save both parties money on real estate agent fees.
There are a few important considerations when deciding if selling your house to a family member is a good decision for you: If you want to maximize your profits, you may not get as much profit as you would if you sold on the open market. While you can sell your house for whatever price you want, a managed sale can result in certain tax burdens for both parties.
Finally, ask yourself if there is any risk of your relationship suffering if disagreements arise during the sale.
How to sell a house to a family member
While it may be tempting to skip steps when selling to a family member because “it’s family,” take precautions and go through the process thoroughly to avoid complications, unexpected tax penalties, and unnecessary IRS investigations. Regulations vary by state, so make sure all parties understand the process in your area.
1. Agree on a way forward
Start the conversation early so you can all agree on the logistics of the sale from the beginning of the process.
- Document everything. To avoid misunderstandings and resolve disputes, keep records of all terms of sale and agreements, just as you would with any transaction with a third party.
- Establish a timeline. Whether you have a year to sell or are hoping to close within a few months, the timeline is important for all parties involved – especially when families need to sell their existing home, secure financing and arrange the details of moving.
- Discuss fundraising. Does the buyer need to secure a mortgage? Are you buying with cash? Discussing this up front can help keep everyone on the same page.
- Agree on contingencies. Having contingencies in your contract protects both parties if something goes wrong during the appraisal, inspection or financing phase of the deal. An agreed-upon plan of action in advance will let you know who is responsible for what.
2. Assemble a team of experts
If you and your family have already agreed on the key selling points, you may think you don’t need a real estate agent to close the deal. But a real estate agent can help suggest fair market value, draft contracts, review paperwork, and ensure you’re following state-mandated procedures.
You may also want to consult with a real estate attorney to understand the contract and tax implications of selling a home. Home Inspector While the appraiser will let the buyer know if there are any major issues with the home, It is required by the lender if the buyer is financing the purchase with a mortgage.
These professionals act as a buffer between you and your family, providing objective advice based on their professional experience and resolving differences when emotions run high.
3. Determine the value of your home
Because control transactions tend to be subject to greater tax scrutiny, you’ll want to document the process you used to establish the fair market value of the home.
Getting a rough estimate online is a great place to start, but you should also ask your real estate agent to do a comparative market analysis to compare your property with similar properties that have recently sold in your area.
Finally, get a professional appraisal. This will be required by lenders if your family needs a mortgage. Even if your loved one will be financing the purchase in another way, a professional appraisal will give you both an accurate assessment of the home’s current value.
4. Confirm the price
The fair market value of the home will serve as a basis for determining the final asking price, but you will still need to decide whether to sell at market price, above market price, or below market price. The option chosen should be mutually agreed upon and clearly written into the final purchase agreement.
Selling below market value can be financially advantageous for your family, but it can also trigger gift taxes. Buyers may also be subject to capital gains taxes when they sell the home, depending on how they use the property and how long they hold it.
If you plan on gifting your home to a family member or selling it at a discount, it is a good idea to consult with an estate or tax attorney to help all parties understand the potential tax burdens and liabilities.
5. Conclude a sales contract
In 2024, sellers $8,000 in closing costsThis includes title insurance, credit checks, document preparation, and other fees necessary to complete the sale. Closing costs typically range from 3% to 6% of the purchase price.
A real estate attorney can be invaluable in drafting the correct closing documents that will protect both parties from future legal issues, potential taxes, and unexpected costs.
Buying from family members
Conversely, buying a home from a family member can also be a great opportunity if it’s the right house for you and in the right situation. As a buyer, it’s important to take steps to protect your interests, especially if you feel pressured to help a family member sell their home due to financial or health concerns.
Get professional price estimates from experienced appraisers, hire legal representation, and utilize a third-party home inspector, just as you would in any equal transaction. Most importantly, remain emotionally neutral. Buying a loved one’s home may be an act of generosity, but it could lead to buyer’s remorse and strained relationships if the timing, the home, or the neighborhood isn’t right for you.
Luke Babich is CEO of Clever Real Estate.
This column does not necessarily reflect the opinion of HousingWire editorial staff or its owners.
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