Buying a home is hard, but if you want to learn how to buy a home from a family member, you're entering truly treacherous territory. Because, let's face it, we've all been to family dinners where a seemingly benign issue can instantly turn into a blood feud. And when it comes to real estate—usually the largest asset most people have—there's a lot at stake financially.
Buying a home from a family member might seem deceptively easy at first glance. You know where they live, so you may think there's little risk of getting swindled, and maybe they'll even cut you a deal. The biggest pitfall, however, is thinking you can skip important steps in the home-buying process because you're on the same family tree.
In the interest of keeping future holidays merry, leave nothing to kinship alone and follow these steps.
Have a family meeting
Difficulty can easily occur when a homeowner and a potential buyer in the same family agree to a sale but keep it to themselves until the deal is in motion.
"Two or more people often come to an agreement about a piece of real estate only to have their ideas ruined by someone who wasn't kept in the loop," says Seth Lejeune, a real estate agent at Berkshire Hathaway HomeServices, in Malvern, PA.
The biggest issue occurs if someone secretly promises a house to a family member and then dies. Or maybe you want to buy your aunt's house—but so does your sister. As soon as the idea of a potential interfamily sale crops up, notify every person affected and come to an agreement.
Work with a real estate agent
Doing a home sale transaction without an agent may seem like a great way to save money and, hey, you're among family, right? But go it alone, and it's most likely the fastest route to headaches and confusion. An agent can not only represent both sides of the transaction fairly, but also keep an emotional distance.
Some real estate brokerages can act simply as a transaction broker, which means less commission dollars. Each side may have to pay only a 1% fee if it's simply a matter of acting as a guide and preparing paperwork, says Lejeune.
Get an independent appraisal
Sellers often place an unrealistic value on a house they love. And as a buyer, you want a price that's fair, but how do you figure out what that number is? By seeking an independent property evaluation through an appraisal before you agree on a sale price, says Michael Kelczewski, a real estate agent with Brandywine Fine Properties in Pennsylvania and Delaware.
While lenders use appraisers to verify that a home can act as collateral for a loan amount, individuals can use independent appraisers, who cost around $300.
Don't skip the inspection
Just because you've had 12 Thanksgivings in a home doesn't mean you're an expert on the furnace's condition! While home inspections are sometimes viewed as a way to protect the buyer from a dishonest seller, the fact is most homes have problems that the owners simply aren’t aware of, says Scott Brown, owner of Brightside Home Inspections in Syracuse, NY.
Even if the house is sold to you at a discount due to family ties, expensive repairs in the thousands could pop up down the line and create hard feelings. Prevent any potential problems by hiring an inspector to identify any of the home's issues so repairs can figure into the sale price.
Set pricing upfront and don't haggle
Ryan Fitzgerald, owner/broker at Uphomes.com in Charlotte, NC, has experienced the pitfalls of buying property from relatives.
"They are by far the most difficult real estate transactions I've ever been a part of," says Fitzgerald. His tip to avoid conflict is to do all of your negotiations upfront. And here's where getting the appraisal and inspection done prior to arriving at an accepted offer is key.
"It's never pretty when there's an appraisal issue, which means the bank won't grant a mortgage for the sales price," says Fitzgerald. In that instance, the buyer and seller would need to renegotiate the deal. "And it's an entirely different dynamic when you're haggling with family."
But if you have every nickel agreed upon upfront due to what was discovered during inspection and at appraisal, monetary expectations are set for everyone.
Lawyer up and sign that contract!
You may feel a handshake with a relative is all you need to seal every deal, but protect yourself by signing a contract.
If there's an objective lawyer trusted by both sides, save some money by hiring just one lawyer. But if there's suspicion of the opposing parties, then retaining your own counsel is a good idea.
Don't skip adding a contract contingency that the deal is void if you can't get a mortgage. You may think your uncle or cousin may understand that you can't buy a home without financing, but it's better to be safe than sorry.