“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:
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:
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:
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.
Every time the real estate agent calls you regarding the potential buyer wanting to see your house, you will need to:
If you sell your home to a friend, the process will be faster. You will avoid the hassle of preparing your house to show.
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:
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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
The new homeowner might get upset if:
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.
The value of your home depends on many factors:
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:
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.
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.
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:
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.
Since you are taking a different approach to sell your home, you need a Title company. The Title company will:
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.
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:
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.
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.
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:
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:
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.
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