Deciding to sell your home to a family member or friend can at first appear to be much easier than putting your home on the market and trying to find a seller. And, in many ways it is. If you decide to go this route, make sure you are prepared for the obstacles unique to this type of transaction with these 6 steps.
1. Get Everything in Writing
Have you ever heard the phrase, “don’t mix business with family”? There is a good reason you have. It is important that both you and your buyer get all expectations on the table. If there are any promises made, get them in writing. The best way to have a mutually beneficial transaction is to be as transparent as possible.
2. Hire Professional Help
Yes, you won’t need to market your home, but you will still need to fill out all the paperwork and have all the inspections done. It may be unnecessary to hire a First Team real estate agent to sell your home but you may want to hire one as a consultant for a flat rate. Another option is to hire a real estate attorney. The real estate attorney will be able draw up all the paperwork and help you navigate your for-sale-by-owner real estate transaction.
3. Secure a New Mortgage
It is tempting to just transfer the current mortgage to the new owner but that path is fraught with problems. The best thing to do is for your buyer to go through the process of getting his or her own mortgage. This will require prequalification and inspections of the home.
4. Have the Home Appraised
Hire an appraiser or two to give you a estimate value on the house. Knowing the price of the home is important to make sure you are not over or under pricing your home. Since your buyer will be getting a new mortgage, it’s likely that the lender will require an appraisal anyway. It’s better to do it before going into escrow so everyone is clear about the value of the home.
5. Avoid Giving Excessive Discounts
You’re saving time and money by selling your home to a friend or family member but don’t make the mistake of giving a hefty discount. From the price range the appraisal gave, don’t sell the home with a discount of more than 25%. If you do, you could get in trouble with the IRS and face an audit. The home sale will be seen as a gift instead of a proper transaction. In that case, the rules are different.
6. Hire a Title Company
Since you won’t be going through the more standard route of working with a real estate agent directly, hire a title company to transfer the home from your name to the name of your friend or family member. This is an important step to finalize the sale of the home.
Selling your home to someone you know can at first seem like a much easier option, but don’t be caught unprepared. Buying and selling a home is a giant financial transaction with consequences that lead all the way up to the IRS. Make sure you are prepared for the unknown by working with a professional, either a real estate agent or real estate attorney, and putting everything in writing. The last thing you want is for the sale of your home to cause you and your friend or family member to become estranged.