Buying a house typically involves a long and complicated process and not a little anxiety. So buying a house from a friend or family member can often seem like an easy solution to make the process quick and manageable. And it can be – if everything goes right. But there are many pitfalls and complications that can often be handled only with the help of an agent. Read on, then, to find out how a agent can help when you are buying a house from a friend or family member.
First, we need to look at some terms, that is, arms-length transaction and non-arm’s-length transaction.
An arm’s-length transaction is the standard type of transaction involved in buying a house. “An arm’s length transaction is a transaction between two parties who don’t have a relationship with one another – whether that’s a family tie, a business connection, etc. Each party is confidently able to act in their own self-interest. For example, when you buy a house from a stranger, it’s considered an arm’s length transaction.”
A non-arm’s-length transaction, on the other hand, is a real estate deal with someone you do have a relationship with, most often a friend or family member. “When a relationship like this exists, there is a greater chance that one party could manipulate the other party in some way, or both parties could work together to try to cheat the fair market price of the home. This is an example of mortgage fraud.”
And that’s why – owing to the possibility of fraud and the legal implications – we want to examine the important role an agent can play when you’re buying a house from a friend or family member. To discover even more about this, contact a agent at 866-593-7012.
Legal Aspects of Buying From a Friend/Family Member
This type of real estate transaction is indeed legal, but there are some considerations to keep in mind . . .
First, there’s the possibility of fraud, and that’s where the principle of transfer pricing comes in. This requires that the sale price of the house be the same as it would be for a transaction between strangers in an arm’s-length transaction to protect involved parties against manipulation. A agent can help with pricing to keep you out of legal hot water.
In addition, because of the fraud potential, buying a house from a friend or family member (a non-arm’s-length transaction) is “treated with a higher scrutiny than an arm’s-length transaction. There are more government and individual lender guidelines to follow when trying to get a mortgage for a home. There are a few things lenders want to guard against in family deals, and some of them are for your own benefit.”
Areas Where a Agent Can Help
Buying a house from a friend or family member can raise any number of sticky issues. So let’s look at just a few of these that a agent can assist you with . . .
“With a non-arm’s-length transaction, you’re going to risk running into more obstacles with getting a loan because of all the added restrictions, and you may be subject to extra taxes because the IRS will be watching closely to make sure a fair market value – and interest amount – is paid for the home. If you buy the home at a cheaper price and then sell it within a few years, you may be subject to capital gains taxes as well.”
EMOTIONAL RESPONSES FROM OTHERS
Buying from a friend or family member can elicit envy or jealousy from other close friends or family members. Your agent can help steer things to keep them on an objective footing, making sure the transaction is treated purely as a business deal.
CHANGE IN SELLER’S FINANCIAL POSITION
“The next potential pitfall is a sudden shift in the seller’s financial situation, which could move them to ask you for more money on the purchase, especially if they provided the loan for you instead of a mortgage lender.” This is a situation in which your agent’s cool negotiating skills will prove their worth.
You Must Find Out . . .
Also, when buying a house from a friend or family member, you absolutely must know everything you can about the house. The problem, though, is that full disclosure is often harder to come by in such situations. Your agent can help you find out what you need to know about these critical points – before it’s too late:
- Whether the friend/family member is current on mortgage payments
- Whether the title is clear, without any liens or other encumbrances
- When and how to get the legal assistance you may need
Buying from a friend or family member can be a great way to simplify a complex process. But it is also fraught with dangers and littered with legalities. So be sure to get the help you need. If you’re considering buying a house from a friend or family member, contact us today at 866-593-7012.