Sometimes a house or property has been in a family for a long time and has sentimental value. But many times, we are seeing that in this highly-competitive market that doesn’t have enough inventory, it may make a lot of sense to put an off-market deal together with a family member. Here are the top 8 questions we get, and things you need to think about.
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1. Do I sell it or gift it?
If you have an existing mortgage on it, you’re going to have to “sell” it to your family member for at least the mortgage payoff amount and closing costs. The buyer then gets his or her own mortgage, and the funds from that new mortgage are used to pay off the old. The reason for this is that the existing mortgage and loan documents specifically prohibit any change in ownership or transfer while the mortgage is on the property. So, if the house has a mortgage on it (which most do these days), the buyer needs to get his/her own loan. Leaving the seller’s mortgage in-place and continuing to pay it after the house has been transferred is considered mortgage fraud. So when you’re wondering whether to “sell” it or gift it, the first consideration is whether there is an existing mortgage, and if so, the “sale” price has to be at least enough to pay off that existing loan.
2. How much do I sell it for?
That’s not as easy of a question as you think! Even comparing the 2020 – 2024 period, home prices have increased on average 47%! The Northeast/New England market area is continuing to lead the national rise in pricing rates even into early 2025. This has two implications for an off-market deal: First, you shouldn’t base your sale price on what you purchased the property for, even if it was only a few years ago. Second, the rate of change means that tax assessor data is lagging quite badly, so using the tax bill is not a good indicator of market pricing.
Sometimes we suggest that you meet with a trusted real estate agent to have them prepare a “comparative market analysis” (CMA) to get a sense of the current fair market value for the property. Use this as a barometer to have a discussion with your family member. Maybe you can save the commission cost by doing an off-market deal with them, and save the aggravation of repair negotiations and seller credits. Or maybe you’ll find (as many of our clients do) that the market prices have increased so much that it just makes sense to sell on the open market.
3. Should I give a family member a discount?
Even agreeing to sell your house to a family member is itself a gift in this highly-competitive market! But if you want to give a price reduction, we’d caution you to think about first doing it as a “gift of equity” at closing. What’s the difference between selling the house for a straight $200,000, or selling it for $300,000 with a $100,000 gift of equity from the seller to the buyer? The answer is that the gift of equity can take the place of the buyer’s down payment (usually 5-20%), so that they can avoid coming out-of-pocket with the cash to close. If the house is older (and Rhode Island does have some of the oldest housing inventory in the country, with the average at 58 years), helping the buyer to keep more cash-on-hand can be very useful for future repairs (roof, heating system or hot water tank, etc.).
4. Suppose I wanted to give a gift after all, can I legally do it?
Sure, it’s a free country! Other than the obvious implication you’ve given away a substantial asset, there currently aren’t any taxes that apply, though you’re still supposed to document the gift by filing a Federal Gift Tax Return – talk to your CPA or accountant for more details.
If you will need to enter a nursing home or other long-term care facility in the next 5 years, and don’t have the assets to pay for it yourself, then keep in mind that this gift is a “disqualifying event” that limits what Medicaid will pay. Our colleagues over at Mccarthy Law can help walk you through the details of Medicaid Planning and better ways to handle this, if the “Medicaid lookback window” is a primary concern.
5. Should the buyer still have a home inspection?
Yes!!! One of the most important parts of a home inspection is ascertaining what repairs will be needed in the upcoming future so that the buyer has a chance to budget and plan for them. We all know that the roof and hot water tank will need to be replaced at some point. It’s not a question of “if”, but instead a question of “when”, because they don’t last forever. The true purpose of a home inspection isn’t for the small, obvious things. It’s for the major things (failing roof, termites, etc.) that either change how the deal should be structured, or might make you rethink it altogether.
6. Even if we’re family and have a “handshake deal” should we still have a Purchase and Sale Agreement?
Yes, for two reasons. First, the buyer’s lender won’t be able to process the file through underwriting for the loan without it. Second, it gives everyone clarity as to the exact deal and terms that have been worked out. We’ve found that a clear understanding and predictable terms are the best ways to avoid hard feelings when unexpected issues arise. The agreement keeps it “objective” about the contract, not “subjective” about the person.
7. Does the Seller have any Closing Requirements even if it’s a family transfer?
Yes, all the same requirements apply! See our guide on the closing deliverables that you’ll need. Even though you might not have an agent helping with these, all the same steps are needed.
8. Can the Seller and Buyer use the same attorney?
While this seems like a straightforward question (and used to be!), it’s not gotten more complicated. In 2024, the Rhode Island Supreme Court issued a voluntary Ethics Advisory Panel Opinion 2024-03 that suggested parties have separate legal counsel in any case where their interests may be adverse or opposed, but did leave an exception for family transactions.
However, we need to contrast this, for example, with the right of any borrower to be able to select an attorney of his or her own choosing (see R.I. Gen. Laws § 19-9-6).
As a licensed and insured law firm, we are always focused on helping you achieve your goals, and can address unique or case-by-case situations to find solutions that are cost-effective for everyone. Contact us today and we review the particulars of your transaction to see how we can help!