Real estate transactions between relatives offer a number of benefits to both buyer and seller. They know they can trust the person they are dealing with and can often cut out unnecessary middlemen that inflate the sale price of the property. However, the same trust that makes these transactions a little bit easier can also become a sticking point if issues arise. These transactions do come with risks, and it’s important to protect yourself by following these best practices.
Rely on Clear and Enforceable Contracts
Real estate transactions are not the time or place for verbal deals or handshake contracts. There’s a reason that real estate transactions are so heavily regulated and require such a substantial amount of paperwork—there’s a lot at stake. Skipping important contracts and documentation can leave you or your relative in a bad place if there are hiccups in the transaction down the line.
Work with a legal professional to draft formal agreements for the sale of the property. If the property is being purchased by multiple family members, ensure that you have documentation specifying ownership shares. You’d be surprised how many of these transactions end up causing painful family disputes down the line.
It’s also important to plan for contingencies. Few property sales go off without a hitch; there’s usually at least some kind of small delay or issue that has to be addressed. Prepare for these and include them in your contracts so no one feels like they have been taken advantage of. Common issues include problems with an inspection, failed appraisals, and financing difficulties.
Determine the Fair Market Value
Depending on the nature of the property sale, you may be purchasing it at market value or at a steep discount. Either way, it is important to know what the property is actually worth before moving forward with a transaction. The market value of a property affects property taxes and other important matters.
If you are buying, don’t just take the seller at their word. They may overvalue the property in their own mind because of their emotional connection to it. Look at recent sales within the same neighborhood, especially those of homes similar to the one you are buying. Secure an appraisal to get the current market value of the property. From there, you can either negotiate with your loved one or budget as needed.
Know Your Financing Options and Tax Implications
One of the main benefits of buying a property from a loved one is the range of creative financing options available. However, these financing options can also complicate a sale or leave you unsure about your financial obligations. You may want to go the traditional route of obtaining a mortgage if your loved one prefers to be more hands-off on the financing side.
You may also look into owner financing or pooling resources among other family members if you are all going in on the purchase of a home. Note that owner financing isn’t always the best option for those who don’t like to feel obliged to loved ones, as it does benefit the buyer more than the seller.
The purchase of a property may come with tax implications. Depending on where the home is and how the purchase is executed, you may need to look into capital gains taxes, gift taxes, and other taxes.
Work With Trustworthy Professionals
This is where some family real estate transactions go off the rails. Family members may want to save money by keeping the transaction entirely within the family and not paying outside professionals to help them through the transaction. This leaves both parties at a significant disadvantage when unexpected obstacles, delays, or issues arise. There are numerous professionals you may want to consult throughout this process.
The first and most obvious is a real estate agent. While this does mean paying a commission, it can help you meet important deadlines and purchase requirements. On the same note, consulting a real estate attorney is very helpful. Real estate attorneys with experience in family transactions can help you avoid the mistakes that often arise in these sales. Other professionals include financial advisors, tax specialists, appraisers, inspectors, and title company representatives.