If you’re thinking about buying your parents’ house, there are many things to consider before moving forward. Buying a home is a substantial financial decision. And when a big money decision involves family, it should be carefully considered.
What are the Reasons You’d Buy Your Parents’ House?
You might have multiple reasons for thinking about buying your parents house. Here are the few common reasons to make the purchase:
Sentimental value. Your childhood home and “things” can bring up memories and create a sense of nostalgia – making them more difficult to let go. You might consider buying your parents house to keep it in the family or preserve the memories.
Financially help parents. This is a common reason people give for buying their parents’ home. Elderly parents, in particular, might have problems with debt or getting by on a fixed income.
Discounted price (instant equity). Sometimes people buy their parents’ home because they are able to purchase it for less than market value.
What are some Risks of Buying Your Parents’ Home?
Lingering emotions and attachment. Attachment to the memories you had in your parents’ house could interfere with your ability to make a sound, well-thought-out, financial decision.
Whether you plan to live in the house, rent it (to your parents or someone else), or sell it, realize any sentimental value the home holds for you and your family could interfere or, at the very least, cloud your judgment.
Not only that, but other family members, including your parents, might have some sense of ownership of the house, even after you buy it. And when other family members get involved, the situation can get even more complicated.
Some family members may want to keep it in the family and leave it exactly as it was in their memories. They might not want you to make changes, sell it, or rent it. Before moving forward with buying your parents’ home, you should weigh the impact of the sentimental value of the house – to you and other family members.
Other family members’ resentment. Buying your parents’ home can be a sticky situation, especially when it comes to other family members feelings on the matter. This could be particularly true if you got a “good deal”.
When other family members get involved in the details of the purchase, not only can it complicate your finances, but your relationships too.
Can be a drag on finances. When your motivation for buying your parents’ home is based on their financial need, your finances could suffer in your attempts to help them out.
Whether you’re buying the house from them so they can move somewhere else, or they are renting the home from you, you will be the one dealing with the repairs, maintenance, and all the other costs that go along with owning a home.
Possible tax consequences. Depending on how the purchase is structured, buying your parents’ home could have tax consequences for both you and your parents.
For instance, if your parents sell the house and don’t buy another, they might have to pay capital gains taxes (unless they qualify for an exemption). And don’t forget real estate taxes that will inevitably need to be paid.
What are some Potential Benefits of Buying Your Parents’ Home?
Can be a boost to finances. Depending on the financials, buying your parents’ home might be profitable for you. As long as everyone involved agrees on the structure and price of the house, and you can realize a profit, buying the home could help you build wealth – just like any other real estate investment.
Can ease the burden of a home sale for parent – and you. When you buy your parents’ home, you and your parents won’t have to deal with the typical burdens associated with buying and selling a home.
You probably won’t need to hire a real estate agent and worry about the logistics, such as coordinating showings and timing the closing.
What are the Options for Transfer of Ownership if You Decide to Move Forward?
Of course, you can buy the home from your parents as you would from any other seller. Since it’s family you’re dealing with, it’s crucial to take extra steps to make sure everyone’s on the same page, and it’s a fair deal.
Here are some suggestions to help make the purchase amicable for everyone involved:
- Get a market analysis (to find the actual market value of the home)
- Make sure everyone involved agrees on a fair price
- If you don’t hire a real estate agent, hire a real estate attorney to facilitate the contract and closing
- Sign a formal contract (purchase agreement)
- Get a 3rd party appraisal
- Get a home inspection (even if you don’t think you need to)
Problems occur with a lack of clear expectations and understanding by everyone involved. Make sure everyone is communicating openly and using the same channels you would if you were buying/selling property from a stranger.
Gift/Gift of Equity
If you don’t have a down payment for the home, some lenders allow parents to offer a “gift of equity” to family members. The equity is the difference between the value of the home and the amount owed on the house.
A gift of equity means your parents’ give you all, or a portion of, the equity they have in the house and the bank allows you to use it instead of a cash down payment. This will require specific paperwork.
You’ll still need to go through the mortgage application and underwriting processes to meet the lenders’ requirements.
Keep in mind, depending on individual circumstances, using a gift of equity can have tax and other financial implications.* Consult a tax professional if this is a concern.
A life estate is an alternative to children buying a parent’s home if the parent wishes to stay in the house until their death.
It’s legal joint ownership of the property, with the “life tenant” (parent) living in and having possession of the property until their death. The “remainderman” (in this case, child) takes possession of the property after the death of the “life tenant”, or life estate holder.
One benefit of the life estate is that, at the time of the life tenants’ death, the property will not go through probate, but instead transfer directly to the joint owners (remainderman). Even though the property doesn’t go through probate, it is still subject to estate taxes, depending on the value.
Final Thoughts on Buying Your Parents’ House
In the end, it’s important to be aware that since you’re mixing money and family, issues you won’t otherwise deal with in the purchase of a home will inevitably arise. The most important thing is that everyone involved is smoothly in agreement with the situation, financially and otherwise.
Facilitating open communication and going through the same steps you would if you were buying a stranger’s home is essential to making it work for both you and your family. Do your homework, talk to the pros, and put everything in writing.
*Possible Medicaid ineligibility. In some instances, if parents gift or transfer their home to one of their children, but continue to live in it, and then later apply for need-based Medicaid services within a short period, they could be denied benefits due to the transfer. While local laws vary, there is often a waiting period (typically 5 years) for Medicaid eligibility after the transfer of property.
Article written by Amanda