We have all heard of don’t do business with family. That is not always true, there are situations and circumstances where it makes sense. The key is by getting everything in writing, the terms, the purchase agreement, the start date as well as the schedule of payments. For everyone’s sake, get an appraisal so that the sales price is verified or even the equity position is verified. Use a Title company to help with paperwork or even the family attorney.
Determine what you are trying to accomplish with the purchase…to help out a family member? To get out from under a loan? To transfer wealth and equity at the lowest cost to recipient? These questions will determine how to structure the loan.
Do you own the property outright? Is there currently a mortgage on the property? Will you be the bank, underwriting the loan? Do they have a lender and will completely pay you off? If you are purchasing the home, can you afford a loan? Have you worked with a lender to get prequaled for a loan?
Selling the home:
- Get everything in writing, get an official purchase contract and work with a reputable title company to help with the details, also ensure that a title search is completed as well.
- Establish value of home with an appraisal
- Ensure that a home inspection is done so that everyone knows what is the situation and what needs to be fixed (Trust me, this will help with any hard feelings and consider this, these are all things that would have to be done anyway if you went a conventional lender/realtor route).
- Determine how the loan will be paid off
- Bank Loan
- Irrevocable Trust?
- Talk to a CPA/Attorney about setting up the sale correctly for your financial needs
- You can gift the borrower up to $13k a year without tax implications
- Pay for closing costs and other seller perks that are available.
- Be the “Bank” for the home loan and have payments made to you (ensuring the title of the home reverts to you if the borrower defaults)
- Add borrower name to Title via quitclaim. They can refinance then and pay you off.
- Have borrower buy into the home with at least 50% of value. Ensure you have everything in writing.
- Make sure that borrower will stay in home as primary residence for at 2 years before they turn around and sell it. Otherwise they might be hit with capital gains tax implications. Also, do not sell for too much of a discount as that will raise red flags for the IRS.
Buying a home:
- Make sure purchase contract is done and that title company is part of the process
- Insist on an Appraisal for your new purchase (it will be about $450 but it is worth it for you in the long run)
- Insist on an Home Inspection – You will know what is wrong or needs to be fixed before you purchase it.
- Determine how you will pay for the home
- Conventional loan with a lender
- Use family member as bank? What is interest rate? How calculated?
- Use gift funds?
- Buy into home?
- Talk to financial professional about tax implications for you
- Be open, honest and communicative
Remember, buying or selling a home is one of the most stressful things that happens in life. Having to deal with the complications of having it be a family member makes it more so. Keep talking about what you both need to get out of the transaction, be willing to add a professional to the equation for both parties sake, and don’t let a home come between family members. Life is too short! We at Capstone Can help you with your Loan Needs, Contact Us Now!