How do I buy my parents’ house?
Just by asking this question you have a winning lottery ticket in your hand.
Why do I assume this?
A. Your parents have a house to potentially sell you. That’s a rare scenario. Many parents may not own a house and of those that do – (B) most of those homes wouldn’t warrant your interest in buying it. It’s in the wrong state. Your parents won’t sell it to you. You need to buy out siblings. It’s in a 55+ community and you’re only 43 years old. It’s too expensive. It’s your parents “forever home”. The house doesn’t fit your lifestyle, etc.
Progress carefully. Deliberately. And discreetly. Very discreetly.
If word gets out that you have an interest or opportunity to buy your parent’s home – you’ll end up competing with cutthroat realtors trying to score a listing commission to pay for their next meal. It could be your dad’s golfing buddy or your mom’s gardening club president. Or even one of your friends you mention the concept to. Realtors can insert themselves into the discussion insidiously first offering to exclude their listing fee if you purchase the home. It will sound like this (Nancy being you, of course):
“If Nancy buys your house, I won’t charge you any listing fee at all!”
Which will sound reasonable to your parents and maybe even you.
But flash forward to the house entering the MLS system (“listed for sale”) and now you have to “win the auction” against other buyers who are very motivated to own your parents’ home. Perhaps even more motivated than yourself, or with more substantial resources (cash/income).
My second piece of advice is: You don’t need a realtor to buy your parents’ house.
You will need an attorney to draw up some documents. But fees for those documents are hundreds, not thousands. You can start with an attorney, OR you can wireframe the deal out with someone you trust. Hopefully, that’s us. We participate in a lot of in-the-family sales and provide a successful deal architecture.
Is this a special type of transaction?
It is. Special doesn’t mean alternative lending or that you need a Non-Qualified mortgage (Non-QM). You don’t. A conventional mortgage should suffice. Special means that there are observation points that will come up, have to come up, that someone needs to be prepared to address.
This will meet the technical definition of an “off-market” deal as well as being a “non-arms length” transaction. Both of those terms require a little finesse when it comes time to apply financing to the deal. I’m assuming you’ll need a mortgage to buy the home and that your parents have financial needs or dollar number that they require to move out.
How do I wireframe the deal?
The sale needs to be equitable for both you and your parents.
So start with the immovable. What are your parents’ financial needs?
It’s possible the transaction evaporates right here on the spot.
Your mother may need to net more money than the home is worth. Maybe she thought of funding her golden years through the future equity appreciation of the house – and the home’s value growth didn’t live up to her expectations. And let’s assume you aren’t a technology or biotech CEO with enough wealth to make a disguised gift contribution to her lifestyle. That means you need to buy a different house.
And that’s OK. You’d rather have the sale fall apart at the conceptual level rather than after heavy emotions have been infused into the discussion.
Add your parents’ existing mortgage balance to their financial needs upon exit and then total that amount. Let’s call this the Floor Sales Price (FSP).
Mortgage Balance + $ Needs = FSP.
Does that amount exceed the allowable current Capital Gains Exemption? (yes, your mother WILL need to check with her accountant on this topic). If there is a Capital Gain event to be paid it should be ADDED to the above FSP. Adding it to the FSP will avoid potential sellers’ remorse for not planning for the predictable tax consequences and leaving one party financially disadvantaged for something that could have been foreseen.
Note: The FSP won’t be allowed to be more than 20% lower than the appraised value of the home. If the home is worth say $1,000,000 and it’s sold for, say $500,000, that would be an obvious loss of sales tax revenue for the institutions that are counting on that money as tax revenue.
On the other side of the coin, the sales price won’t be allowed to be greater than the appraised value, the loan will need to be restructured to adjust for the lower of the purchase price or the appraised value.
If there is further equity available, you can then discuss the advantages of both of the below financial tools to assist you, the buyer.
Gift of Equity from the Seller to the Buyer
A gift-of-equity (GOE) can be put in place in lieu of (or to complement) a down payment.
This means that the paper gift (no cash exchanged) can be substituted for the downpayment. This may, in certain cases, allow you to purchase the home with No Money Down.
The GOE can also be placed alongside your intended downpayment to lower the final mortgage amount, thus reducing the amount of the monthly mortgage payment to you. The overall payment including taxes and insurance (P.I.T.I.; principal interest taxes insurance) can be solved based on a budget by inserting the applicable GOE.
We are experts in the use of GOE including helping you and your parents complete the necessary paperwork to properly take advantage of the gifting process and document it perfectly.
Seller Concession toward Buyer Closing Costs
If your father wants to provide further financial assistance to sweeten the deal for you – and the equity in your dad’s home allows it – he can grant you a concession towards your Closing Costs. This concession appears as a cash credit at closing, and you use it to cover your administrative expenses (Closing Costs) which are expenses beyond your down payment.
Closing costs are the combination of the fees associated with utilizing a mortgage (Loan Costs: appraisal, credit report, flood certificate, lenders title insurance, any origination lender fees, and misc. other fees) and additional fees associated with operating and protecting the home (Other Costs: property & casualty insurance, municipal city or town taxes, transfer tax or tax stamps to the State or Commonwealth, recording charges at the Registry of Deeds)
The Seller Concession is another form of a gift although the same tool can be used in arm’s length transactions (where the buyer and seller aren’t related to each other) as an incentive (for both parties) to lubricate the deal flow. The concession can also be used as a variable fitting puzzle piece to make the finances all come into alignment.
Regardless of this transaction being arms-length or non-arms-length I always say regarding a potential Sellers Concession:
“If you don’t ask for it, you’ll never receive it. The seller can always say no.”
But please note there have been cases where the concession was skeptically asked for and I was startled to see the full request granted. On more than one occasion!
If you need help in estimating the specific amount of the Seller Concession you are seeking, that is a part of the service we offer.
The concessions are subject to maximum amounts as well as restrictions on the use of what these funds can be applied towards. One acceptable use of the Concession is to make an upfront investment to “buy down” the interest rate (lowering it) for the life of the mortgage. We’ve even seen the Concession used for permanently wiping out the monthly PMI expense. How cool is that?
With your parents “walking equity” established …
Now you can begin to look at negotiating and setting the sale price.
Hint: Do not involve a realtor to help you set the sales price. This should be done at the kitchen table in a discussion-style format. Do not utilize a Brokers Opinion of Value (BPO) – need I repeat myself again?
A licensed real estate appraiser (call us for a referral) will provide an unbiased valuation report. And they won’t share your deal secret with a realtor. Sure you’ll pay a few hundred dollars for this service. But it will save you 10’s of thousands of dollars over the free alternative of a BPO by avoiding the over-asking-price-bidding-war-auction and your loss of the use of a gift-of-equity and sellers-concession-towards-buyers-closing-costs. Why risk it ALL for a few hundred dollars saved?
The sale price should be inclusive of the principal that the $60,000 listing commission (on the above $1mm sale price) will NOT be incurred. Basically, that fee stays in the family. To utilize some, or all, of that saved fee – towards a Sellers Concession or GOE – would be a quite reasonable use of the savings.
As you can see, the variables are live-time. There are many “what ifs?”.
The subject of a Life Estate may arise.
Or your parents may want to sell you the house but keep their residence as an In-Law apartment at home?
Maybe the town they’ve lived in for 32 years recently approved the zoning for an Accessory Dwelling Unit (ADU) like they did in Beverly, Portsmouth, and many other towns?
Consider allowing GoldCoast to help you put together the framing for an “as perfect a home purchase as possible.”
And if you’re currently a Tenant paying rent – please visit our Tenants Lounge for tips and resources for becoming a homeowner.