How To Sell A House To A Friend
“If the deal goes sideways, I will lose my money and a friend.”
This was a huge concern when I sold my house to my college buddy. Selling a house is a complicated, legal transaction that involves a lot of money. It can be very emotional. If you are thinking to sell your house to a friend, you must consider that something could go wrong.
Before I dig in here’s a brief video intro on how to sell a house to a friend/
“If the deal goes sideways, I will lose my money and a friend.”
This was a huge concern when I sold my house to my college buddy. Selling a house is a complicated, legal transaction that involves a lot of money. It can be very emotional. If you are thinking to sell your house to a friend, you must consider that something could go wrong.
That said, there are some great benefits to selling a house to a friend. Today, I will highlight both sides and go over the following:
- Benefits of selling your home to a friend
- How to sell a house to a friend
- Disadvantages of selling a house to a friend
- Useful resources for selling your home to a friend
Selling House to Friend [Mixing Business and Friendship]
Selling a home can be a complex thing. It is one of the most important transactions people go through. It requires a lot of paperwork, time and patience. Selling a home to a friend sounds like a faster way as you can avoid:
- listing your home
- marketing and
- showing your home to strangers
And all of this is true! So many benefits when selling a house to a friend. Why wouldn’t you do it?
Selling a home to a friend can come with benefits. BUT BUYER (AND SELLER) BEWARE… It can bring unforeseen issues as well. To ensure the deal goes smoothly make sure:
- You do good research on what is involved in home transactions
- Understand all the possible pitfalls (don’t just focus on the good stuff)
- Have a documented plan to sell your house
- Constantly talk to your friend about the home sale.
There is so much to unpack in this topic about letting your friend buy your house. Who would of thought? You want to sell your house to your friend and we want to save you from a lot of headaches. Are you ready to read the best possible guide on the internet?
Let’s start.
Table of Contents
Benefits of selling your home to a friend
1. No showings
Every time the real estate agent calls you regarding the potential buyer wanting to see your house, you will need to:
- make your home presentable
- clean your house from clutter
- turn on the lights or open the curtains
- make sure that your house has a pleasant smell
- leave your home
If you sell your home to a friend, the process will be faster. You will avoid the hassle of preparing your house to show.
2. No commissions
Every real estate agent will charge you a commission to sell your house. The commission is normally 6% of the sales price. The real estate agent invests time in:
- listing and marketing your home
- speaking to potential buyers
- organizing open homes and showings
- filling out the paperwork for you
All these actions require money and the commission pays for it. When you sell your home to a friend, you don’t have to involve a realtor. Because you don’t need all the services they provide. If there is no realtor, there is no commission to pay. You get to save a lot of cash.
3. Negotiate a deal that works for both of you
You should treat your friend as a regular buyer. After all, it is your home and money. Have a real estate appraiser evaluate your home to find out the real value. An appraisal can help to:
- form the selling price
- avoid over or under-pricing your home
- negotiating a fair price
If you sell your home with more than a 25% discount from the appraised price, you might get in trouble with the IRS. It can be seen as a gift and not a sale. Since different taxes and rules apply here, be mindful of the possible issues. You don’t want to go through an unexpected audit.
4. You get to visit your “EX” house in the future
If you sell a house you love to a friend, you will get a chance to come back. Since you are friends, you likely will:
- be a guest
- remember the good times you had in your home
- see the changes and repairs
- participate in redesigning a house
The home renovation can turn out to be a fun project for the two of you. You will know the ins and the outs of your home and you will be able to assist.
5. You get to move at your own pace
It is most likely that your friend will let you stay in your home until you move. Maybe you are in the process of constructing a new home or moving to a different state. All these may take some time and your friend will surely understand.
6. Take the savings and invest them
If you sell your home to your friend, you will save some money. The extra money you get to keep could be used to pay off any debt. If you have children, it can be put aside for a college fund or some other future costs. Alternatively, you could use the money to invest in your retirement.
Disadvantages of selling a house to a friend
1. Giving the profit to your friend
As a generous friend, you can lower the price of your home by $15, 000 or more. Depending on the negotiation skills of your friend, you may end up lowering the price even further. At the end of the day, it is a financial transaction. Your friend will probably want to get a good deal.
2. Your friend might not get along with your neighbors
You may be friends with your neighbors, however, it might be a different situation with your friend. What you consider friendly may differ from your friend’s manners. Your neighbors may not accept the new member of the community. You can introduce your friend to the neighbors before the sale. Next to this, you could organize a party or a barbecue so your friends could socialize.
3. You might not like the changes in your “EX” home
You have just put in new drywall and brand new tiles. However, your friend might not find them as appealing. The new homeowner will probably make changes. Your friend might break your new tiles or create an extra room. I imagine you have spent quite a lot of time designing your home. These changes can upset you. Someone is breaking your hard work and stepping on your efforts.
4. Things could break
The new homeowner might get upset if:
- the roof leaks
- kitchen cabinets fall apart
- there is a plumbing issue
- door breaks, etc.
All these things and many more may create tensions in your relationship. Make sure to talk over these things before the transaction. A home inspection can help in preventing issues in the future.
5. Your friend can’t afford your home
The value of your home depends on many factors:
- investments you have made (for example, new kitchen cabinets or a new pool)
- the amount of renovation you have done
- price someone is willing to pay
- the location of your home (good vs. bad neighborhood)
Ask your friend to get pre-approved for a mortgage before making an official offer on your home. Pre-approval will state how much money a borrower can lend based on:
- income,
- current debt and
- credit score
The process can take a few days or just a few hours. There are no guarantees that your friend will get a loan. You will be able to sell your home if your friend is eligible to get a mortgage.
How to sell a house to a friend
Selling a house to a friend can be a great option. However if you are not a real estate expert you should get some professional help. Professional help will make sure you sell your house and remain friends!
There are some real estate authorities that can make sure the sale goes smooth.
Real estate attorney
If you are unsure about all the legal paperwork, you can hire a real estate attorney. A real estate attorney can draft you a purchase agreement. You shouldn’t rely on a handshake. In the contract, you will agree on:
- the exact price,
- mortgage terms,
- escrow deposits,
- what appliances and furniture will come with the house, etc.
If you sell your house to a friend it is called a “for sale by owner” or FSBO deal. Keep in mind to have separate attorneys. This way your interests are equally represented.
Title company
Since you are taking a different approach to sell your home, you need a Title company. The Title company will:
- make sure that you have the right to sell your home
- transfer the ownership over your home to your friend
- do title insurance
- file the documents to the authorities on your behalf
This is good to know since you are leaving out the real estate agent from the transaction. Once the ownership is transferred, the sale is complete.
Have a home inspection
If you want to sell your home, it is wise that you call a licensed home inspector. A professional inspection of your home may uncover hidden problems that aren’t visible.
Benefits of having a home inspection:
- get familiar with the condition of your home
- get the necessary repairs in time
- increase the value of your home
- install trust in your buyer
- prevent buyer’s regret
- sell more easily
Identity Certification Form
Before selling a home to your friend, you should fill out the Identity of Interest Certification form. The Federal Housing Authority requires this document. You will avoid possible issues in the future if you fill out this form. If you keep it to yourself that your friend is the buyer, the loan might get rejected. If the loan gets rejected, there is no sale. Additionally, selling a home to a friend without disclosing it constitutes mortgage fraud.
Property condition disclosure statement
This form should be completed to inform the buyer about the defects in your home. These may include potential health risks, things that require repair or are damaged. PCDS is beneficial to complete if you want to avoid potential legal problems that may arise later.
Sell to friend with a realtor
Hiring a real estate agent
The beauty of hiring a realtor when you sell your house to a friend is if something goes wrong you can blame the agent, right?
Hiring a real estate agent can ease the process of selling your home. They can represent your interests when negotiating the price. You may offer a big discount at a price that you might regret later. Also, your friend may convince you to leave part of the furniture that you wanted to take. Agents will deal with the paperwork as well and ease that step of the way.
Real estate agents can prepare a comparative market analysis (CMA). Benefits of using CMA:
- compare your home to the houses nearby
- get the prices of homes that were sold lately in the area
- get the right estimate of your home
- get the best possible price for a house
Should you finance when you sell to a friend?
Seller financing
Seller financing is usually used in cases where traditional financing is not available. In other words, your friend might not be eligible to get a mortgage from a financial institution. Here comes the option of you becoming the lender. This is all arranged by signing a promissory note.
Things to know before entering into seller financing:
- A promissory note – is an agreement between the seller and a buyer in seller financing. This note contains the buyer’s promise of paying a certain amount of money to the seller. A promissory note contains the schedule of payment, interest rates, the sum of money borrowed and the consequences if the buyer is late with the payment. This note can be further sold to investors or lenders.
- Higher price – as the seller is giving funds for the sale, the price of the property might be higher than usual.
- Quick sale – lenders usually require from sellers to make repairs on the house before the sale. Since the seller and lender are the same people, there is no need for pricey repairs and the deal can be closed.
- Lower closing costs – since the bank is not participating in the transaction, you will not have to pay for mortgage points or origination fees.
- Short-term – seller financing is active for only five years. After that period the buyer will have to pay off the debt by getting a loan from a lender.
- Eviction process – the seller might have to refer to this process if the buyer is not able to repay the debt
- Down payment – in most cases, the buyer will have to make a 20% down payment like in traditional mortgages.
- Title search – buyer should make sure that the property is not under a mortgage. If the seller has a mortgage on it, then it could cause complications.
You can sell a house to a friend
In conclusion, you can sell a house to a friend if you act as if your friend is a person you just met. Get all the documents and checks that you need to make a good decision for the two of you. Ultimately, what matters is that you and your friend are happy with the transaction. You will be able to enjoy the following years without any seller’s remorse or regret on your end.
USEFUL RESOURCE: Can I sell my house to my son for $1?
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