One of the headaches of selling a property is finding the right buyer; although, oddly enough, the right buyer could be eating French fries just in front of you at the dining room table. Selling a house to a friend takes away that headache of finding a buyer. In fact, you don’t need a realtor when you sell to a friend, you only need to hire an attorney. But it’s easy to get personal with friend real estate transactions and end up on the wrong side of the deal, or worse, on the wrong side of the law. Let’s see how to sell a house to a friend.
Can I Sell My House Under Market Value to a Friend?
The process of selling a home can be daunting, from marketing to showings to endless offers and counteroffers. In some way, you realize that things could be a lot easier if you were dealing with one of your family members or friends. And it just so happens that you know someone in that group in need of prime real estate.
Since this is someone you are closely related to, you feel compelled to give them a discount and perhaps wonder what the law stipulates about this.
So, can you sell a house to a friend under market value? The answer is yes. You can sell your home to a friend or relative for less than it is actually worth. But you need to know how to sell a house to a friend without issues. There are some precautions you need to take to avoid a ruined friendship, family scuffle, and maybe even legal problems.
Related: Real Estate Market Value vs Market Price: Learn the Difference
Things That Could Go Wrong When Selling a House to a Friend
A seasoned real estate agent will advise you to be careful and not allow any personal relations to push you into wrong deals. You should take that advice seriously for a very good reason. During the closing process of a real estate deal, lots of things can go wrong, leaving you with a bad deal and a bad taste in your mouth.
Some of the problems that may arise include:
Tax problems: Selling a house to a friend is classified as a non-arm’s length transaction, due to the personal relationship between you and the buyer. Non-arm’s length transactions are usually subject to more scrutiny due to the higher chances of fraud.
Selling your property to a friend at a price below market price could raise a red flag with the IRS, especially if the discount exceeds $15,000. $15,000 is the maximum gift of equity that a single person can give in a year. Exceeding that amount means that the buyer will have to pay gift tax on the excess balance. For example, a gift worth $20,000 means the giver is liable for a gift tax on the $ 5,000.
Schisms: Transacting with a close friend or family member means you’re more often than not putting your relationship with them on the line. It is important to weigh your options carefully and decide what matters most to you – your business affairs or your personal affiliations.
Foreclosure: In the event that you are the one financing the mortgage, you could find yourself in the uncomfortable situation of having to foreclose on your friend’s mortgage if he/she no longer pays.
Agreement: A deal that relies on word-of-mouth agreements about what is and is not included in the transaction is likely to go sour very quickly. That’s why it’s important to get all the stipulations, down to the smallest details of the contract, in ink.
Related: Net Zero Homes: The Complete Guide for Investors
Selling a House to a Friend Below Market Value? Follow These Tips
There are certain precautions you should take when selling a home to a friend. Some of them are general protocols that must be observed when selling property to anyone, but some are specifically for non-arm’s length transactions.
Carry out a home appraisal: It is important to find out the comparative value of your property. A real estate agent will come in handy here, as they are better equipped to perform comparative market analysis. Still, if you’re willing to put in the time and effort, you can do your own research to find out the price of similar homes in the neighborhood and establish a rate based on the property’s fair market value. Be aware that some lenders require that the property be professionally appraised before granting a loan. Therefore, you may have to pay for a qualified appraiser.
Plan for a home inspection: A home inspection is needed before signing any agreement to avoid any problems down the line. The home inspector will check the house for any structural issues or safety concerns. You can also ask the buyer to conduct another home inspection.
Insist on mortgage pre-approval: A mortgage pre-approval letter is quite easy to acquire and can save you a lot of heartaches
Fill a property condition disclosure statement: Let your buyer know what to expect. Disclose anything that needs repairs, is damaged/non-functioning, or poses a health risk.
Hire a real estate attorney: Real estate attorneys help guide you through the legal nuances surrounding non-arm’s length transactions.
Related: 10 Tips for Selling a Rental Property
Buying a House From a Friend Without a Realtor? Follow These Tips
- Acquire mortgage pre-approval. Mortgage pre-approval is a lender’s way of saying that your chances of getting a loan are high. However, it doesn’t explicitly guarantee that you will get one. You definitely want to get pre-approved unless you are paying cash. It will save you the pain of having to pay for a home inspection and appraisal before you find out you can’t get a mortgage.
- Hire the services of a real estate attorney. A legal practitioner will be crucial in ensuring that the deal doesn’t go awry or fall foul of the law.
- Insist on a seller’s disclosure. A seller’s disclosure is a legal document that lists all known defects and malfunctions on the property. It lets you know exactly what you are buying in advance so you can decide if you wish to go ahead with the deal.
- Work with a title company. A title company will perform a search to find out any existing liens on the house. They will also check to find if anyone else can lay claim to the property. Hiring a title company puts you on the safe side, preventing future problems.
Related: How to Buy a House Without a Realtor as a First-Time Investor
In a Nutshell
By taking the necessary precautions and keeping your emotions in check when selling a house to a friend, you can get a smooth and satisfying deal that benefits both parties and strengthens your friendship bond.
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