Dear MarketWatch,
My spouse and I are looking to buy a house.
We are the only ones in our family who don’t own a house yet, and our parents have offered to “sell” us their house as they move away, as long as we work it out with our siblings.
Our parents generously noted that otherwise the house would be an inheritance for us to split and we don’t want any tension or resentment.
Our siblings have agreed to this in theory but we are trying to determine the best setup.
Two big advantages to this, as opposed to just looking for any other house, would be that we wouldn’t be market bidding for a house and wouldn’t have to take out a traditional mortgage if we are just paying back siblings over time.
Any suggestions on how to best determine the right financial agreement to proceed?
Signed,
Aspiring Homeowner
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage. Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Aspiring,
Given that most home sellers aren’t keen on giving up their ultra-low mortgage rate, coupled with the fact that there are so few homes on the market in some parts of the U.S., I understand the intention here.
But the phrase “as long as we work it out with our siblings” is concerning because of what could go wrong. You said that you plan on paying back your siblings over time and will avoid taking out a traditional mortgage.
The first step you should take is to get multiple appraisals so you know how much the house is worth. If you take the traditional mortgage route, the bank would order an appraisal directly to know the market value of the home, Ari Rastegar, CEO of Austin-based Rastegar Property Company, told MarketWatch.
Knowing the market value of the house is “fair for you, fair for your parents, and fair for your siblings to see that you’re not getting some really low and cheap price,” he explained, “and also for your own protection, not getting an overinflated price.”
To buy the house, you can consider asking your parents to give you and siblings a “gift of equity,” Aaron Kovac, an Austin-based mortgage broker, told MarketWatch.
The “gift of equity” transfers some of your parents’ stake in their home to you and your spouse and your siblings. But for this transaction, all parties involved need to agree to a home sale that’s lower than the appraised value. In theory, your parents can give their $500,000 home to you for the full amount, according to Rocket Mortgage, as a generous gift.
Once you all agree to the amount being gifted, you then need to sign a “gift letter,” which lays out your relationship, the equity gift amount, the appraised value of the home, and the date. Talk to a lender and a lawyer and they will help you with the paperwork and the sale of the home.
Kovac suggested that once you and your siblings and spouse receive the “gift,” depending on how you want to split the property, your parents can pay your siblings who don’t want the home the money from the sale of the home. That way, “the parents can disburse their proceeds to the other children to avoid any future argument or conflict,” he added.
Bear in mind, “gifting” equity triggers a tax if the home is sold below market value, so factor that amount into the costs involved if you pursue this route. The tax is triggered if the gift of equity exceeds $34,000 ($17,000 each per parent).
It may be a neater solution than what you suggest, which is to pay your siblings their equity each month over time. You may just be swapping out a debt owed to your siblings instead of to a lender.
But if you are still keen on that route, if the house is meant to be passed down as inheritance to your family and you want to create a financial arrangement that doesn’t involve your parents gifting you the property, you will need to consult an estate planning lawyer who can help you work out the nuances of what you seek.
And it goes without saying, having a will will help in the event that your parents pass, so as to avoid any fights over the proceeds of the sale.
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