Homeownership

Are You Really Prepared to Buy Your Friend’s Home?

June 11, 2018
buy friend's home

You’ve always adored your friend’s home, and now it’s on the market. Doing business with friends isn’t always easy, though. The lines between business and friendship can get blurred and make it difficult to protect everyone’s best interests. What steps can you make to buy your friend’s home as smoothly as possible?

Only 6 percent of those who purchase a home buy one belonging to a friend, relative or neighbor. There are many reasons this might be the case, including that most people move to a new area other than the one they currently live in, but if you buy your friend’s home, you are definitely in the minority.

There are a few things that will help you prepare if you’re buying your friend’s home.

1. Appraise the Home

Even though it’s tempting for the buyer to offer a friend or family member an amount that is below market value, this isn’t fair to the seller and could create hard feelings. Instead, go ahead and call an appraiser and find out how much the house is actually worth through a bank’s eyes. This also allows the buyer to understand how to secure a loan.

2. Agree on a Price

Your next step is to sit down with your friend and find out what price they want for their home. Ideally, this will end up close to the market value. Keep in mind that buying a home for less than 25 percent of its worth might trigger a gift tax situation where you’d owe the IRS money. There are a few ways to handle this so the gift tax that comes into play for anything over $13,000 isn’t triggered, but you’ll need everything in writing to avoid misunderstandings.

3. Get Pre-Approved

Once you have a ballpark number for the home, go to your lending institution and get pre-approved for a loan in that amount. Make sure you get pre-approval in writing. Once you’ve hashed out all the details, you don’t want to risk losing the chance to buy your friend’s home because your financing fell through at the last minute and the seller was forced to go with another offer.

4. Sign Paperwork

Even though you’re doing business with your friend, you should keep a paper trail of offers and agreements. This also prevents the misunderstandings from verbal agreements. Realtors are experts at negotiating offers and writing up paperwork. If the buyer and seller are already in place, you might negotiate a slightly reduced fee for the realtor’s services. You can also use a real estate attorney to complete paperwork for you. Even though this is your friend, make sure you include a contingency about the inspection coming back okay.

5. Walk Through and Disclosures

Once the previous owner vacates the property, you should do a walk-through before signing the final paperwork. This ensures the home is in the condition it was when you made your offer. Even though you’re doing business with your friend, you should still stick to the same standards as if you were buying from a stranger. In some states, the homeowner is required to disclose certain things about the property, so check to see what paperwork you should have.

6. Invite Them to the Housewarming Party

Once the transaction is complete, and you’ve moved in, invite the previous owners to your housewarming party. Make them the guest of honor. They may feel a bit nostalgic leaving a home they loved, and this allows them to see that you love and appreciate the same home they did. After all, you’ve done everything above, so you’re all still friends. Let them celebrate your big moment with you.

Buy Your Friend’s Home

Buying from a friend or family member may seem easier at first glance, but it’s important to keep everything professional. The IRS looks closely at issues such as buying the house at a discount, so you may face some added concerns that need careful attention. However, you’ll also gain a home you love and that has already provided you with good memories!

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