Selling a Home to a Friend or Relative

Selling your home to a friend or relative with whom you enjoy a great relationship should be easy, right? Unfortunately, selling your home to friends or family members are often prone to pitfalls that might cause hard feelings in the future or even problems with the transaction itself.

If you are selling a home that a friend or relative would like to buy and would like to maintain the relationship without losing the sale, the following rules of engagement may be helpful. 

1. Keep it Professional

The first and most important rule when selling a home to friends or relatives is to conduct the transaction just as you would if you were selling the home to a stranger. This means that you as the seller and your friend or relative as the buyer should both be represented by your own reputable real estate professionals who can act as go-betweens should disagreements arise. To prevent potential issues, ensure that all communication about the sales transaction go through your respective real estate professionals. 

In addition to helping facilitate the transaction and keep moving things along, a real estate agent will help the seller and buyer negotiate a fair market price on mutually agreeable terms. Real estate professionals use their experience to help avoid pitfalls that might otherwise have to be dealt with during a standard transaction, which means a better chance at closing a successful sale.

In addition to seeking the assistance of real estate professionals, both you and your friend or relative who is offering to buy your home should use independent professionals such as home appraisers, inspectors and title preparers to ensure the transaction goes as smoothly as possible.

2. Get Everything in Writing

While it may seem unnecessary when selling your home to someone you know well, it is actually just as important to use properly written, signed documents as when selling to a buyer you have just met. Documenting negotiations, sales contract terms and other details necessary to the transaction is actually a great way to reduce stress in the process because it prevents misunderstandings and gives both parties a way to ensure that every part of the agreement is being fulfilled. 

3. Avoid Becoming a Lender

If you own your home with no mortgage or liens, and your friend or relative wants to buy your home - but asks you to consider owner financing, it is often best to decline. That is because agreeing to owner finance the home would effectively place you in the uncomfortable position of being their lender. Later, if the buyer becomes unable to meet their payment obligations, you could be forced to foreclose on them, resulting in tremendous stress on the relationship. Additionally, sellers should generally decline to co-sign the mortgage for a buyer, as they could then be liable for the payments should the buyer default sometime later.

To avoid this problem, make it clear to the buyer from the start that you will not owner finance or be a cosigner. Then encourage them to make their offer contingent upon being able to qualify for a traditional mortgage. This will give them a way to gracefully exit the transaction, should they fail to qualify for a home loan with an acceptable rate and terms. This will also allow the buyer to exit the transaction if the mortgage lender's appraisal fails to appraise the home for enough to cover the purchase price. 

4. Remember Capital Gains Taxes

If the home you are selling is paid for and a family heirloom or has other sentimental value and your buyer is a sibling or other close relative, you may feel an urge to gift a portion of the home to them in the transaction. Doing this could be a mistake if it means your buyer is purchasing the home below market value. This would have the potential to trigger capital gains taxes should they later sell the home for profit. Work closely with your real estate professional when pricing the home. If you want to gift something to your relative or friend, consider doing so with furniture from the home, a gift card or a treasured personal possession.  

Keeping these rules of engagement in mind when selling to a friend or relative can help bring about a successful sales transaction that works to the benefit of all parties.