Sell ​​your home to a family member in 5 easy steps

If handled properly, selling your home to a family member can be a great way to help a loved one save money on a home and build wealth. However, an off-market transaction between family members requires careful planning and transparent communication to avoid misunderstandings and ensure a seamless process.

Why is selling to a family member different?

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.

A business transaction is conducted between strangers, each acting in their own financial interests. The majority of real estate sales fall into this category and typically use a buyer’s and seller’s agent to negotiate on behalf of their respective parties.

In a controlled transaction there is an established relationship between buyer and seller. A controlled transaction may be subject to increased scrutiny from the IRS, especially if the property is sold below fair market value. However, it can save both parties money on brokerage fees.

When deciding whether selling your home to a family member is a good decision for you, there are some important considerations. If you’re hoping to maximize your profits, you may not make as much as you would on the open market. While you can sell your home for any price you want, a controlled sale may involve certain tax liabilities for both parties.

Finally, ask yourself whether the relationship is likely to become strained if disagreements arise during the sale.

How to sell your house to a family member

It may be tempting to skip steps when selling to a family member because of the “it’s just family” mentality, but take precautions and go through the process thoroughly to avoid complications, unintended tax penalties, and unnecessary IRS oversight. Regulations vary from state to state, so make sure all parties understand the process at your location.

1. Make agreements about how to proceed

Start the conversation early so that you all agree on the logistics of the sale from the beginning of the process.

• Put everything on paper. To avoid misunderstandings and resolve disputes, keep a record of all terms and agreements of the sale, just as you would in a business transaction.

• Set up a timeline. Whether you’re a year away from selling or hoping to close within a few months, a timeline is important for all parties, especially if your family member needs to sell an existing home, secure financing, and arrange moving details.

• Discuss financing. Does your buyer need to take out a mortgage? Do they buy with cash? A conversation beforehand ensures that everyone is on the same page.

• Make agreements about unforeseen circumstances. Contingencies in the agreement protect both parties if issues arise during the appraisal, inspection, or financing phases of the transaction. Thanks to the pre-agreed plan of action, you know who is responsible for what.

2. Assemble a team of professionals

You might think that if you and your family member already agree on the key selling points, then an agent isn’t necessary to complete the transaction. However, an agent can help propose fair market value, draft contracts, review documents and ensure state-required protocols are followed.

You can also consult a real estate attorney about contracts and tax implications associated with selling a home. a home inspector will notify the buyer of any significant problems with the home while an appraiser will be required by the lender if your buyer is financing the purchase with a mortgage.

These professionals can act as a buffer between you and your family member, providing objective advice based on their professional experience and resolving disagreements when emotions run high.

3. Determine the value of your home

Because audited transactions are typically subject to stricter tax scrutiny, you’ll want to document the process you used in determining your home’s fair market value.

You can start with an online appraisal, but you can also ask a real estate agent for a comparative market analysis, which compares your property to similar properties that have recently sold in your area.

Finally, get a professional appraisal, which is required by a lender if your family member needs a mortgage. Even if your loved one finances the purchase another way, a professional appraisal gives both parties an accurate estimate of the home’s current value.

4. Finalize a price

The fair market value of your home can serve as a basis in determining the final asking price, but you must decide whether to sell at market value, above market value, or below market value. The option you choose must be agreed upon by both parties and clearly described in the final purchase agreement.

Selling below market value is a financial benefit to your family member, but you may have to pay gift taxes. The buyer may also be subject to capital gains taxes when he sells the home, based on how he uses the property and how long he owns it.

It’s a good idea to consult a real estate or tax attorney if you plan to gift or sell your home to your family member at a discount so that all parties understand the potential tax burden and obligations.

5. Close the sale

In 2024, sellers will report paying $8,000 in closing costs, which includes title insurance, credit check, document preparation, and other costs necessary to complete the sale. Closing costs are typically 3% to 6% of the purchase price.

A real estate attorney can be a valuable asset in preparing the proper closing papers that protect both parties from future legal problems, potential taxes, or unexpected costs.

If you are buying from a family member

On the other hand, buying a home from a relative can also be a great opportunity, provided it is the right property and the right circumstances for you. As a buyer, it is important to take steps to protect your interests, especially if you feel pressured to help a family member sell due to financial or health concerns.

Get a professional price estimate from an experienced appraiser, hire legal representation and engage a third-party home inspector, just as you would in a business transaction. The most important thing is that you try to remain emotionally neutral. While purchasing your loved one’s home can be a generous act, you risk buyer’s remorse and potentially strained relationships if the timing, house or neighborhood aren’t right for you.

Luke Babich is the CEO of Clever Real Estate.

This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners.

To contact the editor responsible for this piece: [email protected]