Buying a Home from a Relative
You don’t choose your family, as the saying goes, but you do choose what house to buy. Sometimes, that house might come from a family member.
While buying a house from a relative isn’t a common type of real estate transaction, it can happen for all sorts of reasons, such as keeping a property in the family or choosing to move back to your hometown.
Because family is involved, these real estate transactions also tend to look a little bit different than a “normal” home sale. That’s because these types of sales are considered non-arm’s-length transactions, and both buyer and seller can sometimes save on Realtor commission fees and closing costs. Such transactions might also move quicker than traditional ones by avoiding contingencies.
Arm’s Length vs. Non-Arm’s-Length Transactions
“Simply put, an arm’s length transaction is one in which the buyer and seller both act in their best interest to get the best deal possible for each party,” says Omaha, Nebraska-based licensed real estate agent Andrew Helling. “In a nutshell, this means that each party is trying to get the best deal possible for themselves. If you’re a buyer, you’re seeking to get the lowest price, and if you’re a seller, your goal is to get the highest price.”
However, things are a little different in a non-arm’s-length transaction, such as buying property from a relative.
“A non-arm’s-length transaction is when one party influences another,” Helling says, noting that most non-arm’s-length transactions arise when the buyer and seller know each other. “For example, if you are buying a house from your mother, she will likely sell it below market value.”
In these types of transactions, typical competitive market forces are removed, which generally results in a better deal for a single party, he says, rather than both parties.
Helling had the added benefit of experiencing a non-arm’s-length transaction firsthand when his twin brother bought a new house and needed to sell his old one:
“He sold it to me at a price 10% under market value so that we could move quickly on a deal with no contingencies. While he could have sold it in the open market for more money, we assumed much lower closing costs than normal, because our Realtor drafted the contract for a flat fee. The seller pays closing costs, so my brother still netted the same amount of money. As for me, I got a better deal because the sale price wasn’t inflated to cover standard closing costs.”
Helling says he was also able to avoid an inspection fee since he used to live in the home and knew its ins and outs first hand.
“All of these things are unusual in a typical home sale,” Helling admits, “but it meant we could close faster, my brother still netted the same profit, and I got a lower price on the home.”
Similarities Between Transaction Types
While inspections, negotiations and reduced Realtor commissions in non-arm’s-length transactions differ from typical market home sales, there are some similarities, Helling says. The biggest one?
“In most cases, you still need a real estate agent,” he says. “There’s a lot of paperwork to handle when transferring title to a home, and any small misstep can cause you trouble down the road. For this reason, it’s wise to always involve a real estate agent and attorney to help you with the process,” he says.
If you’re using a loan to purchase the home, you’ll still have to undergo qualifications and a home appraisal. Depending on the lender’s requirements, you may still need a home inspection, even if you know the home firsthand.
Will you save money on Realtor commission and closing costs?
Helling implores buyers to use a real estate agent even if they know the seller personally. However, you’ll likely save money on commission and closing costs.
Helling says that while most real estate professionals charge a flat fee of 3% of the sale price, you can ask for a reduction for a non-arm’s-length transaction (after all, the agent probably didn’t find the house for you if it’s coming from a relative).
A seller may save on closing costs in this type of transaction because as a matter of courtesy, the buyer sometimes absorbs more of the closing costs given that the seller may have sold the property below market value.
What type of transaction is better?
“Because people can be emotional, direct negotiations and communication can sometimes spell disaster in a real estate transaction,” says Lexington, Kentucky-based real estate broker and marketing professional Ron Humes. “Personalities can collide, communications sour, and transactions can fall apart quickly.”
On the other hand, a buyer might get a great deal if he or she knows the seller. It truly depends on the personalities of the individuals and the nature of the relationship and communication, Humes says. He continues:
“One way to minimize future regret and ensure that nobody feels cheated is to use the services of professionals who know how to protect the interests of all involved. Real estate agents have contracts that will allow the purchase and sale of a property to follow the process of a typical arm’s length transaction. It has the provisions for appraisals, home inspections, repair negotiations, pest inspections, title search, and more. This will help ensure that a fair market value is paid and received for the home, no unknown defects are assumed in the property or the title, and both parties can move forward with a clean conscience.”
Helling mentioned purchasing a home from his twin brother above, but what about someone who doesn’t work as a real estate professional? Monte Gaustad, based in California, purchased a home from his parents several years ago.
“My parents had planned to relocate for years, and I was considering moving to a bigger home at about the same time,” Gaustad says. He says there was a little sentiment tied to the home, but not much—given he hadn’t lived there for more than 15 years and had owned two other homes previously, it was almost entirely a practical, logical decision.
Gaustad says one of the biggest benefits of purchasing his parents’ home was knowing the history of the house. “I was present for all of the improvements and maintenance over the years,” he says. He also opted not to use an agent, so the price was discounted due to no sales commission.
If others are thinking about buying a home from a relative, Gaustad says to consider fairness first and foremost.
“I paid fair market value, less than the typical commission, so no one could later say they ‘gave’ me the house,” Gaustad says. A few surprising family issues cropped up as well, such as hurting his parents’ feelings when he tore out landscaping. Fortunately, he says, “they got over it.” Even better, they can laugh about it these days.
“When my mom visits, she’ll spend days trimming some of her old plants the way she likes them,” he says.