How to Sell a House to a Friend: 11 Do’s and Don’ts
Whether you have a mountain cabin, beach bungalow, ski slope condo, or beautiful home anywhere in the country, you’ve probably heard more than one visitor exclaim: “Wow! This place is gorgeous! If you ever decide to sell, please let me know.”
Well, that day has come. And, it turns out your friend is serious about buying your home, and you’re feeling great that you don’t have to find a buyer on the open market.
At the same time, there are innate challenges and financial aspects to weigh. You don’t want to face regrets later on about how much you sold the house for or how the deal came together — after all, it’s still a major transaction rife with emotion.
With these potential difficulties in mind, follow these 11 do’s and don’ts on how to sell a house to a friend if it’s something you’re considering.
It’s always tougher to negotiate with a friend. If you don’t have professionals involved, you can make a mistake that could cost you later.
Do: Consider hiring a real estate agent
Hiring a real estate agent is not compulsory when you sell a house to a friend. If you’re wondering, “Can I sell my house to my friend without a realtor?,” the short answer is yes. But it’s the moment when your friend asks if you’ll throw in the furniture as part of the deal or lower the price just a little more that you might be glad to have an agent to communicate on your behalf.
“It’s always tougher to negotiate with a friend,” says Edward Kaminsky, a top real estate agent in Los Angeles County. “If you don’t have professionals involved, you can make a mistake that could cost you later.”
Kaminsky says that for a transaction among friends, he’s amenable to discussing a commission discount or even a flat fee.
An agent won’t need to offer their full level of service to include yard signs, digital marketing, and professional photography, but they can act as a neutral go-between to prevent strain or awkwardness during negotiations.
An agent can also help you determine the fair market value of the home or find an appraiser so you don’t unintentionally sell your property at a discount.
While the seller and the buyer can each engage their own agent, some states allow one agent to represent both parties.
“Good agents who understand their dual fiduciary responsibility to both clients can walk that line very effectively,” Kaminsky says. “They help clients save money by representing both sides and a pre-arranged discount.”
Don’t: Hire the same attorney
Not all states require you to hire a real estate attorney to buy or sell real estate, but it’s almost always advisable to get legal representation in a sale among parties with a pre-existing relationship.
This is true whether or not you decide to work with a real estate agent. While an agent will be more hands-on in coordinating the transaction and helping you decide on a price, providing legal advice is outside the scope of an agent’s services.
While some attorneys may offer to handle the entire deal, the lower-risk route is going to be for you and your friend to each hire separate attorneys to protect your individual interests.
If the relationship with your friend ever sours, you’ll likely be glad you didn’t share an attorney down the road.
Do: Consider the tax implications of selling below market value
Selling a house to a friend is an example of a non-arm’s length transaction, an arrangement that may lead the parties to make an agreement that diverges from typical market terms. (This is in contrast to an arm’s-length transaction, where the parties doing business are unaffiliated and acting in their own self-interest.)
Non-arm’s-length transactions are legal but can create a higher risk of fraud and require correct tax allocation. They may be subject to heightened scrutiny and trigger a tax event for either party.
For example, if you offer your friend a discount on your home – intentionally or not – it may be considered a “gift of equity” subject to gift taxes.
As outlined in IRS Publication 709, you can generally give up to $16,000 in value to as many people as you want — or $32,000 if married and filing jointly — without having to report those gifts to the IRS.
If the gift amount exceeds that guideline, it must be reported so that it can be subtracted from your lifetime exemption limit of $12.06 million in gifts. Gift amounts that eventually exceed the exclusion threshold of $12.06 million are taxed at a rate of anywhere from 18%-40%.
So, it’s best to determine how much the home is worth, either through a real estate agent’s comparative market analysis or, more formally, by having it professionally appraised. That way, you can provide documentation to your tax advisor to determine if you made a gift of equity to your friend.
Don’t: Be lenient on the pre-approval step
If your friend plans to pay for your home with all-cash, then you want to have your attorney verify proof of funds.
However, if your friend intends to finance their purchase, they should get pre-approved by a lender for the appropriate loan amount before you consider them a buyer in earnest.
Having pre-approval can save you from the frustration of going through a home inspection and appraisal processes only to discover your friend can’t get a mortgage (though, pre-approval is not a guarantee to lend, and financing can still fall through).
Usually, a pre-approval can be completed in a few hours to a few days and involves verifying the borrower’s income, credit, and monthly debt obligations as a proportion of income.
Your friend would likely need to take this step to tour or make an offer on a stranger’s home, and it’s not a step you should skip, even if you have an abundance of trust that your friend will qualify for the funds they need.
Do: Think carefully about price
Kaminsky says price negotiations among friends can go either way: “There are people that are looking to get every penny out of the sale of a property and that becomes more important than anything else — more important than the friend. Others who are extremely generous and are willing to reduce the price by thousands of dollars.”
Get an online home value estimate
No matter which side of the spectrum you fall on, consider beginning the pricing process with HomeLight’s Home Value Estimator, which uses publicly available data, recent sales records, and your home’s most recent sale price to provide a preliminary estimation of value in under two minutes.
This can help you get oriented with current market values in your area and be a good starting point for determining your price range.
Use other tools like a CMA and appraisal
If you hire a real estate agent, they will include a comparative market analysis (CMA) as part of their services. A CMA looks at the sale prices of nearby homes with similar characteristics to yours, then makes dollar adjustments based on competitive differences to provide a pricing recommendation.
The CMA gets more detailed than an online estimate, and is able to account for nuances like recent upgrades, curb appeal, and issues like road noise. It’s also advisable to get a home appraisal for an official record of what your home was worth when you sold it to a friend.
Weigh the pros and cons of a discount
It’s human nature to want to help a friend. But selling below market value is not a decision to be taken lightly. A home is often a person’s most valuable asset. Not to mention, selling a house comes with its own expenses, including settlement fees, attorney fees, and transfer taxes.
If you’re certain that you won’t have any regrets about offering a discount, then there is nothing wrong with that, and you should be sure to file the correct paperwork regarding the gift of equity if applicable. Otherwise, recognize that price could be a point of contention and tricky to negotiate with a friend.
Over the years, Kaminsky has seen sellers reconcile their need to help a friend and receive a fair sales price in creative ways. “I find sellers are willing to discount to the level that they’re not paying it to a realtor,” says Kaminsky. “The seller may say, ‘I’ll give you 2% off because I’m getting 2% off on the commission. Then, we’re all happy.’”
Don’t: Forget about clearing title
You must clear title — in other words, prove ownership without any additional claims to (or “encumbrances” on) the property — before you can sell a home to anyone, including your friend.
A title company or real estate attorney will conduct what’s called a title search as a step in the due diligence period of a home purchase. A title search is a comprehensive evaluation of records, sources, and documents to identify all available and relevant title information about a particular property.
If the title search unearths issues like money owed for a remodeling project on the home (called a “mechanic’s lien” in some states), unpaid taxes, or child support liens, those issues will need to be cleared before the sale can move forward. Because title issues can take a long time to resolve, a preliminary title search is often advisable.
Do: Plan for the buyer’s home inspection and appraisal
Most buyers opt to have a home inspected before closing. And if your friend is using a mortgage to purchase the home, the lender will require an appraisal to determine the amount of funds they’re willing to provide.
Even if your friend wants to waive the inspection, it’s probably best to do the hard thing and politely decline. It’s extremely important for an inspector to evaluate your house for any major issues or safety hazards. A thorough evaluation empowers both parties to feel confident there are no hidden issues or agendas moving forward.
So far, selling your home to friends has allowed you to avoid the prep work involved in showings. But now, you should prepare for the home appraisal by spending some cleaning up the yard, touching up the paint, and deep cleaning on the interior. These simple efforts can help show the appraiser that you’ve taken good care of the home. Clearing clutter allows the appraiser to easily access the parts of the home they need to see to form their opinion of value.
Don’t: Assume special treatment on inspection negotiations
Even if you and your friend have agreed on a price, the home inspection opens the door for further negotiations.
Now’s not the time to offer favors or ask the buyer for special treatment. As you negotiate, consider each request as you would if you had anonymous buyers — and expect they will do the same.
They have the ability, like any buyer, to request you repair any issues related to water damage, structural issues, old or damaged roof, electrical systems, plumbing problems, or issues with the HVAC system — or essentially anything that poses a safety risk.
As the seller, you’re not required to provide any repairs, though major issues like those listed above may affect the buyer’s ability to secure their loan. When it comes down to it, you may choose to tackle the big stuff but reject any repair requests to fix cosmetic imperfections or small projects under $100.
“It’s important to understand what you legally need to provide to the buyer whether they’re your friends or not,” says Kaminsky. “You want to protect yourself as a seller and you don’t want to ruin their friendship.”
Do: Get everything in writing
Did you agree to leave the washer and dryer for the buyers, but plan to take the stove because it’s a $5,000 six-burner Viking range? Are you taking your pool equipment with you to your new house?
Did you agree to offer a $1,000 price discount to fix the driveway, but you don’t plan to get it repaired before you leave?
Did you ask your friend for a two-day extension after closing so that you have extra time to move out?
A verbal agreement means nothing. Be sure to document the slightest detail in the contract.
Don’t: Sweat about having to swap your financial details, it will stay private
As your friend updates you about the mortgage pre-approval process, you might worry about seeing too much of their personal financial information.
However, Ruth Wordelman, a top-selling agent in Colorado Springs, says not to worry about the disclosure of sensitive financial information among friends. The process is no different than if you were selling your home to someone you don’t know.
“Other than a pre-approval letter, the seller doesn’t see the full financial picture of the buyer,” says Wordelman, who is also a licensed real estate attorney. “All you see are the final numbers of what the lenders are charging them.”
By consulting with a professional, you’ll ensure that the financial information you and your friend swap is minimal and strictly for business.
Do: Be transparent about your relationship to the buyer throughout
Disclose, disclose, disclose.
Anyone you hire to help you sell your home needs to know that you’re working with a friend, so that professional can make sure the deal is fair and legal for everyone involved.
The buyer’s lender along with your real estate attorney, transaction broker, or real estate agent need to know about the relationship.
If your friend is acquiring a mortgage through the Federal Housing Administration, you also need to fill out an FHA Identity of Interest Certification form. One of the questions asks about the relationship between you and the buyer.
Sell your house, keep your friend
While it may be counterintuitive, Kaminsky says, “treating the sale as a non-friend transaction is your best chance of a comfortable, smooth closing — and retaining your friendship.”
Do the deal right and you could maintain a fabulous friendship, get a fair price for your home, and avoid a lot of the work you’d normally do to sell a home in the process. Nothing’s better than that, except maybe an invitation for a weekend stay at your friend’s gorgeous new home.
Header Image Source: (Simon Maage/ Unsplash)