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If you’re planning on selling your home, you might have a relative who might be showing interest in buying it off of you.
That could potentially make things a lot easier for you, considering the fact that there’s no need to market your property, and you can close the deal quickly.
Or, it could turn into an ugly mess that can leave you both on awkward terms with one another.
You want to make sure you get what your home is worth in the current market, but you also don’t want to compromise the relationship with the relative you’re selling to. When it comes to money, anything can happen.
Keep the following tips in mind when selling your house to a relative or close friend so you can keep the relationship intact while getting the most out of the sale.
Be Up Front About Your Relationship
If you or your relative don’t want to land in any hot water with the government, you’d be well-advised to disclose the nature of the relationship between the two of you with your lender. Anyone who fills out an application for mortgage insurance with the Federal Housing Authority will typically be asked to submit an Identity of Interest Certification form if there’s a relationship between the buyer and seller.
It’s not exactly common to have a mortgage denied as a result of family ties, but failure to reveal this information can point to mortgage fraud, which will lead to a denied loan application.
Make Sure Both Sides Are Getting a Good Deal
Your relative might confront you about taking your home off your hands with the intention of getting a hefty discount. And perhaps you might want to help them out in that way.
On the other hand, you might want to get the most out of the deal as possible. But if your relative can get a much better deal on the house down the block, there’s no sense in wheeling and dealing with you.
Either way, dealing with price points on a real estate sale between two parties who are close to each other can lead to major tension.
The best solution to this potentially sticky situation is to have a mutually agreed-upon appraiser come in and evaluate the home for both of you and provide an unbiased opinion of what the home is presently worth under today’s market conditions. That way no one is low-balling anybody, and only the fair price is being worked with.
If you do decide to offer a discount, make sure you’ve got an experienced real estate agent in your corner to help ensure that both parties benefit from the transaction.
Make Sure They Can Afford the House
Even after you and your relative agree on a price for the home, you still have to make sure they’ve got the finances to back up the purchase. It would be pretty awkward if you both go so far as to have a legal contract drafted up to complete the real estate transaction, only to find out shortly after that they can’t get approved for a mortgage.
Never assume that they’ll be able to find a lender who is willing to loan out the funds needed to finance a big purchase like this. Regardless of whether they’re buying off of someone they know, or a complete stranger, they’ll need to get approved for a mortgage.
If you fail to inquire about whether or not your relative is good for the cash before agreeing to sell to them, you could wind up back in square one if they fail to qualify for a loan.
Act as if you’re selling to any other buyer, and not just a relative, and ask for a pre-approval letter from their lender before you start negotiating on a price.
Get a Home Inspection
Even if the person buying from you has spent a ton of time in your home, that doesn’t necessarily mean they know all the nitty gritty about it, including any potential problems that may be lurking.
Maybe you aren’t even aware of some of the possible issues that might be hiding in your home. If any problems pop up after they’ve bought and moved into the home, it can cause some tension in the relationship.
To prevent that from happening, make sure you have your home inspected by a professional home inspector that you both agree to hire. That way any issues will be uncovered and laid out before the buyer. Not only will this help them make a more informed decision, it’ll also keep things kosher between the two of you.
Deal With Special Tax Issues
If you decide to arrange a seller take-back mortgage with the buyer, make sure you dot your “i’s” and cross your “t’s” with the IRS. That’s because they’ll calculate “imputed interest” when seller-backed mortgages for relatives are involved.
Even if no interest was charged on the mortgage, the IRS will consider interest to have been paid for tax reasons. They calculate imputed interest as a means of collecting tax revenues on mortgages that aren’t attached to any interest, or if the interest rate is extremely low.
Simply put, you could be subject to mortgage interest revenue if you carry a no-interest mortgage for your relatives, and they in turn could owe money in the form of capital gains taxes if the house is flipped for a quick profit.
While plans to sell to a family member have worked for many Americans, they’ve also turned out to be relationship killers for others. To make sure you’re part of the former group, make sure you seek the advice of a real estate agent and mortgage broker to protect both you and the buyer to avoid any problems in the near future.