Buying a House from a Family Member

Buying a house is a process that we look forward to but dread at the same time. While it’s exciting to start a new chapter in your dream home, getting through the process of buying can be tiresome. That’s why many people decide on buying a house from a family member. Besides keeping the business part casual, it’s always nice to buy a place that has a special meaning for you. Maybe that’s the house you grew up in, or it’s where you spent summer vacations with your cousins. However, purchasing your new home from a family member is not all rainbows and sunshine. It has both its perks and drawbacks. Therefore, we’re here to walk you through this process step-by-step so that you can make an educated decision.

Arm’s Length Transaction Vs. Non-Arm’s Length Transaction: Understanding the difference

Before you decide on buying a house from a family member, you have to understand the real estate laws and all the legalities regarding this process. We particularly advise learning about arm’s length and non-arm’s length transactions, as well as the difference between the two. So, read the following explanations carefully!

Arm’s length transaction refers to the business conducted between parties who don’t have any prior or existing relationship. For instance, if you decide to buy a house from someone you never met before, you’re engaging in an arm’s length transaction. Since both parties, buyer and seller, are operating out of their own self-interest, the price they agreed on is much closer to fair market value.

Non-arm’s length transaction, also known as an arm-in-arm transaction, occurs when parties doing business have an existing relationship. The perfect example of this is when someone is buying a house from a family member, a friend, or a business associate. When it comes to this type of transaction, parties often don’t act in their own self-interest like they do in arm’s length transactions. For example, when parents are selling the house to their child, they will probably try and give them a good deal and, thus, get further from the actual market value.

So, since we’re talking about purchasing a home from a family member, you’ll be doing a non-arm’s length transaction.

Benefits of buying a house from a family member

Now that you know what kind of transaction you’ll be doing with a family member, let’s see what kind of benefits you’ll have!

You know the person selling you your next home

There is something uncomfortable about meeting the home seller for the first time. They will try to make a great first impression; you’ll try to stand your ground. All in all, it can get awkward and unpleasant very quickly. Additionally, you may not like the home seller or vice versa. These are just some of the risks. However, if you’re buying a home from a family member, you know you can trust them from the beginning. The meeting will be more pleasant and easy-going. And when the atmosphere is relaxed and comfortable, so is everything else that comes with it.

You know the house you’re about to buy

Since you know the people that are selling you their house, you also know the house itself. One of the most anxious moments when it comes to buying a house is not knowing what to expect once you walk through the front door. Well, this is something you’ll avoid if you’re purchasing a house from a relative. You already know how this family member treated their home.

Additionally, you probably already have an idea of what changes to make and what you absolutely adore. This can also help you when the time comes to move into this house. Knowing exactly which belongings you can relocate right away is a huge plus, and the team behind Verified Movers can help you find the best moving crew!

Flexibility is A-OK

When you don’t know the seller, everything has to be professional and up to date. Additionally, all communication goes through the real estate agent. However, if you’re buying your new house from a family member, this whole process can be much more flexible. For example, they will understand if you can’t come to the latest meeting, and they will happily reschedule. Additionally, you can be more understanding if they need more time to find a new place to live, so you can’t move into your new house right away. On the other hand, if you’re buying a home from your parents, you may even live with them until they move out.

You may receive a gift of equity

If a seller agrees to accept a reduced percentage of the gross earnings from the sale of the house, he is gifting a buyer a certain amount of their equity. When the lender accepts the gift of equity, they are actually using it as a down payment and, thus, lowering the loan amount. This means you might not need to have money for a down payment if you get a gift of equity. Even better, if the sum exceeds 20% of the property’s value, you may also be able to avoid paying private mortgage insurance. However, you should consult your real estate agent about this.

Drawbacks of buying a house from a family member

While buying a house from a family member has many great benefits, it also has a few drawbacks you have to consider. Let’s what are some of the most common ones!

Creating family drama

When you’re mixing family and business, it’s almost inevitable to create family drama, especially when there’s money involved. Unfortunately, buying a house from a family member fits perfectly into this description. So, if your family member took advantage of you during the selling process, or if they’re constantly coming over because they miss their old home, it’s safe to say you’ll have some awkward family holidays. Not to mention other relatives could get involved, so the drama can escalate. Unfortunately, this is very common.

Non-arm’s length transactions have more limitations

When the business is conducted between two parties who know each other, there is a greater risk of mortgage fraud. As a result, lenders take extra measures when dealing with these sorts of transactions. They do this to protect themselves and the other parties involved from shady practices like deception, increased costs, and the use of straw buyers. For example, lenders can require sellers to sell their house for the real market price and not cut a deal with the buyer – no matter if they are family. Additionally, when it comes to short sales, most parties will have to sign an arm’s length transaction even though they have a relationship.

Tax implications

Purchasing a home from a family member may bear some tax implications, such as capital gain taxes. Additionally, if the seller gave you a gift of equity, they will probably have to pay taxes on it. We suggest checking this with your financial advisor or a lawyer. It’s something you don’t want to play with.

Is it time to move into your new home?

If you’ve gone through the buying process trouble-free, now it’s time to organize the move as smoothly as possible. Since this is something you cannot do on your own, we suggest contacting a trustworthy long-distance moving company in Florida that will help you with this process. So, make a list of everything you need to organize it and show it to your moving crew so they can tailor the relocation to your needs. And you’ll be in your new house sooner than you think!

Final notes

As you can see, buying a house from a family member is a gray area. Even though there are many benefits, you must be careful at all times. After all, this is a business, not a fun family dinner. So, make sure to protect yourself with a financial advisor, real estate agent, and even a lawyer if needed. On the other hand, try to be understanding of your seller’s needs and maybe some issues, if there are any. Compromise and good communication are crucial in this kind of situation.

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