How to buy a house from a family member

There are a lot of things that go into buying a home, such as looking for a home, finding the perfect place, making an offer and competing with other buyers. One potential way to simplify the stress of a competitive market is to buy a house from a family member. This is called a non-arm's length transaction. A non-arm's length transaction is a transaction between a buyer and seller who have a preexisting relationship, as opposed to an arm’s length transaction, where the parties have no prior affiliation. Let’s learn more about how to buy a house from a family member, along with some pros and cons.

Why buy a home from your family?

There are a handful of reasons why buying a house from a family member may look like an attractive option. For instance, maybe a family member is downsizing or moving somewhere warmer for retirement. This may allow you to purchase a turn-key property that you know was well-maintained, in a neighborhood you’re familiar with. You may also want to purchase a home for a sentimental reason, such as if your parents are selling your childhood home. Another reason could be that you don’t have enough money saved for a down payment. In this case, the family member may offer a gift of equity.

What is a gift of equity?

A gift of equity occurs when a property is sold to a family member or close associate at a price lower than the current fair market value. The difference between the sale price and the market value is the gift of equity. For example, if your parents own a home worth $350,000 and they sell it to you for $200,000, you receive a gift of equity of $150,000. Most lenders will allow the equity to be used toward a down payment. A gift of equity must be documented through a gift of equity letter, and the homebuyer must independently qualify for a mortgage.

How buying a house from family works

In some ways, buying a house from family works the same way as buying a house on the open market. Overall, however, the process is generally expedited as it eliminates the need for house hunting and negotiating offers. The steps typically include the following:

1. Getting preapproved for a mortgage: Before you jump into anything, ensure you’re able to get a mortgage by prequalifying with a lender by getting preapproved. This way you’ll know how much you can afford.
2. Discussing purchase with family: If you know a relative is planning to sell their house, sit down with them and discuss the possibility of buying it.
3. Agreeing on a price: Make sure you determine if your family member plans to sell the house at fair market value, or if there will be any gifts involved, such as gift of equity, cash gift or a down payment gift.
4. Hiring a lawyer or real estate agent: Work with an attorney or a real estate agent to create a formal purchase and sales agreement. You and your family member should each have your own representative.
5. Securing financing: This is the time to get all your funding in order to complete the sale.
6. Moving in: It’s time to close — pack your bags and move into your new home!

The pros and cons of buying a house from family members

As with anything, there are both pros and cons when it comes to buying a house from family. While terms will differ from person to person, these are some of the pros and cons you may experience:

Potential pros of buying a house from family

• Less competition: Since the house isn’t on the open market, you won’t have to deal with other buyers competing for the same home.
• Lower closing costs: If you’re purchasing from a family member, you’ll likely be able to avoid some costs, such as earnest money.
• Lower sales price: Your family member may be more likely to sell you their home at or below market value, rather than just trying to get as much as possible through a bidding war. This is called a gift of equity.
• Lower (or no) down payment: Better down payments may make your offer more attractive when dealing with competitors. However, this may not be necessary if your family member is choosing to sell to you.
• Trust: If you have a good relationship with your family member, you can likely trust them to be honest about any issues with the home that they know about.
• Ease of process: Buying from a family member eliminates multiple steps in the homebuying process, including some of the more stressful ones like putting in offers.
• Sentimentality of keeping a home in the family: Whether it’s the house you grew up in or your aunt’s house where you spent every holiday, it can be nice to keep a house in the family.

Potential cons of buying a house from family

• Potential for conflict: There’s always a risk of conflict when mixing money with close personal relationships.
• Potential tax risks: If you purchase the house for less than its market value, you’ll have to claim a gift of equity on your taxes. Talk to a tax specialist for specific advice.
• Overlooked inspections: You may be less likely to scrutinize the property, especially with a professional, if you’re familiar with it or if you’re trusting your family member to be upfront about any issues.
• Less choice: You don’t get to look for a house that’s a perfect fit if you’re buying from a family member.

In summary

Buying a house from a family member could potentially be a foray into homeownership or provide a chance to upgrade from your current house. When you look at the logistics of how to buy a house from a family member, the process may be relatively faster, less stressful and more cost-efficient than a standard market sale tends to be. However, keep in mind that money can also become a source of conflict, even between close family members. Typically, there are more pros than cons, but everyone’s experience differs.

How to buy a house from a family member FAQs

1. Can my parents sell me their house below market value?

Yes, your parents can sell you their house below market value if they choose to do so. This may qualify as a gift of equity, in which case they will have to fill out a gift of equity letter.

2. Can I buy a house from my parents with a mortgage?

Yes, you may use a mortgage to purchase your parents’ home, or potentially assume their mortgage if they have one — note, however, that this is up to the lender’s discretion and approval is given on a case-by-case basis. Your options will depend on your specific circumstances, so you may want to talk to a lender and real estate attorney to learn more.

3. What is a non-arm's length transaction?

A non-arm's length transaction is a transaction in which the buyer and seller have an existing personal relationship. For instance, if your parents sell you their house, that would be considered a non-arm's length transaction.