Key Insights to Keep in Mind
Unlike the typical real estate deal, acquiring a property from a relative falls under a non-arm’s length transaction category — where pre-existing personal ties between buyer and seller are at play. Such arrangements often attract heightened attention from mortgage providers and carry the risk of stirring up family disputes.
To dodge future misunderstandings, it’s wise to engage a seasoned real estate attorney to craft a detailed contract that leaves zero room for ambiguity.
Dreaming of homeownership but feeling daunted by the sky-high market values, fierce buyer competition, and the exhaustive search for the perfect place? Directly buying from family—whether it’s an elderly parent downsizing, a sibling relocating, or another relative—can streamline many of these hurdles. Let’s unravel what’s crucial to know when stepping into the world of family home purchases.
Who Stands to Benefit Most from Buying a Family Member’s Property?
Prime candidates tend to be those intending to make the house their main residence. Robert Killinger, a senior loan officer at Movement Mortgage in Danvers, MA, points out that “conventional mortgage programs typically prohibit buyers from acquiring homes as second houses or rental investments if there’s a family or business connection with the seller.”
Adult children with limited savings might also find this route appealing. Killinger adds, “In such cases, the seller could offer a gift of equity, enabling the buyer to enter the property with minimal or zero down payment.” Parents passing homes down to their grown children often avoid the headaches of listing and open houses.
Ideal circumstances involve purchasing from a family member with whom you share a solid rapport and who is prepared to sell the house at a reasonable price point, notes Matt Teifke, co-owner and broker at Teifke Real Estate in Austin, TX.
The Upsides of Buying from Family
- Save on agent commissions: By striking a deal directly with a trustworthy relative, you could dodge paying the typical 2.5% to 3% realtor fees. For instance, a $300,000 home sale might save each party up to $9,000.
- Possibility of a friendlier price tag: Teifke highlights that relatives may be open to lowering the price “since there’s no middleman commission” and, naturally, because you’re family.
- Avoid the house-hunting grind: Purchasing from kin means skipping countless tours and listings. If you’re already familiar with the property — perhaps having grown up there — you likely appreciate its quirks and layout.
- Less intense due diligence: A good relationship often translates to trust regarding the home’s condition. “When family ties are strong, you can rely on honest insights about maintenance,” Teifke explains. In some instances, a costly inspection might even be skipped.
Potential Downsides of Family-Purchased Homes
However, putting blind faith in an informal handshake agreement with family can backfire dramatically. Financial dealings of this magnitude can unleash bitter feelings.
Dennis Shirshikov, head of growth at Summer and an adjunct professor at CUNY, warns: “Without careful documentation and legally binding contracts, you risk sowing seeds of conflict.” He recommends safeguarding everyone by putting agreements on paper and having them reviewed by a lawyer.
Problems with the property can balloon once family is involved. Kristen Conti, broker and owner of Peacock Premier Properties in Englewood, FL, shares a common scenario: “Critical systems like HVAC, plumbing, or roofing might fail post-closing, leaving buyers feeling deceived—even if the seller is kin—which can fracture family bonds.”
Mid-Article Fact Insert
According to recent data, roughly 10% of home sales in the U.S. involve family transactions, with many buyers taking advantage of equity gifts to reduce upfront costs. Moreover, non-arm’s length deals can experience up to 15% longer mortgage approval times due to enhanced lender scrutiny.
Five Essential Steps for Buying From a Family Member
- Sort out your financing options: This might include a seller-financed arrangement where your relative acts as the lender, bypassing traditional banks.
- Agree on the sale price: Decide if you’ll pay market value or if any gifts—equity, cash, closing cost credits—will be involved. Killinger reminds buyers that “all gifted funds require proper documentation via a gift letter and must satisfy lender underwriting rules.”
- Draw up a binding contract: Employ your agent or lawyer to create a thorough purchase agreement covering the price, conditions, and allocation of fees or commissions.
- Secure mortgage approval: Initiate your loan process while understanding that lenders will typically demand a title search and an appraisal, each carrying a fee. If you opt for a professional home inspection, schedule it now.
- Finalize the closing: The last phase involves signing all necessary paperwork and settling closing costs. Many states require an attorney to supervise this process, so clarify beforehand who will engage and pay for legal representation.
Understanding Non-Arm’s Length Transactions
Such deals occur when buyer and seller share a personal or business connection, contrasting with standard transactions where strangers pursue independent interests. This intertwining of relationships can complicate the process.
Martin Orefice, CEO of Rent To Own Labs, cautions, “Shared interests in big deals like home sales increase fraud risk—either by conspiring to underprice the property or one party exploiting the other.”
Because of this, some lenders refuse to finance these sales, while others apply stricter underwriting. Hiring legal counsel is especially advisable, whether your purchase involves a loan or a gift. Orefice notes, “Purchasing near market value minimizes tax complications. Buying below market price triggers a gift of equity declaration for tax purposes.”
Do’s and Don’ts When Buying Within the Family
Do:
- Fully commit to the purchase: Killinger advises, “Ensure you’re absolutely certain about the property. Emotions around family homes can cloud judgment—be all-in.”
- Document everything in writing: Teifke stresses, “A detailed written agreement protects both parties from future disagreements.”
- Seek expert advice: Although saving money is tempting, consulting pros like attorneys, realtors, and tax specialists prevents future headaches and familial strife.
Don’t:
- Enter without a clear financing plan: “Make sure you can genuinely afford the home before sealing the deal,” warns Teifke.
- Accept unfavorable terms: Family ties don’t negate your right to protect your own interests. Insist on a professional home appraisal to ensure a fair valuation.
- Skip legal or real estate representation: Even if it feels unnecessary, experts know the ins and outs of paperwork, disclosures, and title transfers, ensuring your transaction closes smoothly.