Hallelujah, your friend wants to buy your home. Fast-forward through all the time you would have spent on showings, staging, and marketing your house. This sale is going to be as easy as pie, like the kind you won’t have to serve at any open houses (‘cause you’ll be skipping that, too).
Got your happy dance out of your system?
Let’s not forget that you’ve still got a big chunk of change on the line, and what’s that they say about friends and business? Oh yeah, don’t mix them.
Sure, selling your house to a friend can turn out fine and dandy, but top real estate agents and attorneys who’ve been in the middle of these deals urge you to stay neutral and vigilant so you don’t let the relationship cloud your best interests. Learn how to sell a house to a friend with advice from the pros, and you won’t end up in a legal scuffle or picking up the pieces of a damaged relationship.
Do: Negotiate with your real estate agent on their commission
According to our analysis of real estate transaction data, the national average real estate commission is 5.8%, half of which usually goes to the buyer’s agent. That all changes if you list your home with an agent, and your friend comes along and says they’ll buy your house.
Everything in real estate is negotiable, so if you bring a buyer (your friend) to the sale, there’s a good chance your agent isn’t going to expect that you pay them a full commission, as you’ve done a large chunk of the work for them.
“Once you’ve listed, then the Realtor’s already involved. But there’s no need to engage the full real estate commission if I don’t have to do all the photography and put it in the MLS,” says Ruth Wordelman, a top-selling agent in Colorado Springs who works with 77% more single family homes than average.
A common scenario in that case would be for the listing agent to drop the commission rate to something around 3.5% and handle both sides of the deal for the buyer and seller the rest of the way. (Check your listing agreement for any terms you agreed to regarding bringing a buyer to the sale and reduced commissions.)
Now, if your friend says they want to buy your home and you haven’t yet listed it with a real estate agent, you can simply hire a real estate attorney to facilitate the transaction for you.
“For me if they haven’t listed it yet, and lenders come directly to me for this, then I’ll just do it as an attorney and I charge them $500 bucks,” says Wordelman, who is able to do this because she’s both a real estate agent and an attorney.
Don’t: Try to handle the paperwork and negotiations without a professional by your side
Selling a home to your friend still requires a legal contract and that means you’ll need to come to an agreement with more than a handshake.
At the very least you’ll want to work with a real estate agent who’s familiar with the process and can parse the paperwork for you.
If you haven’t already hired an agent (and even if you have), real estate agents and practicing attorneys who’ve witnessed legal nightmares unfold at closing agree: sellers should lawyer up.
A purchase agreement is one of the first documents you need to secure the deal. The specifics of the purchase agreement will vary depending on your state, but it will include details like the down payment, sale price and closing date.
Once that’s signed and you go under contract, you’ll want an attorney to help you clear up any title issues (trust complications, unpaid balances from lenders, property taxes, and more) so the sale can move forward.
Then, you and the buyer will enter escrow, where documents and payments are pulled together to complete the sale. Your real estate attorney’s job is to thoroughly read everything and identify any issues.
(Don’t forget that unexpected obstacles that crop up before closing delay 36% of home sales, so just because you’re under contract doesn’t mean you’re in the clear.)
With a real estate attorney by your side, you’ll avoid issues that could cost you time, money, and the deal itself.
Do: Ask your friend to get pre-approved for a mortgage
Your friend calls you up and says, “I want to buy your house!”
After exchanging pleasantries, you shouldn’t end the call before you say, “Great, why don’t you go ahead and get pre-approved and we’ll go from there?”
Pre-approval basically guarantees that your friend could afford your home and qualify for a mortgage to finance it. (If your friend is paying all cash, then you’d just want to have your attorney verify proof of funds).
The main thing is you don’t want to go through all the steps of a home inspection and appraisal only to find out that your friend can’t get a mortgage in the first place. The pre-approval process is a painless income and credit check and can be completed in a few hours at a lender’s office.
With a pre-approval letter in hand, your friend can make an offer on your home in good faith.
Don’t: Reduce your price just to be nice
It’s human nature to want to help a friend in need. But selling your home to a friend is not necessarily the appropriate time to do that.
Depending on the situation, you may be tempted to give your friend a discount on your home, or they may ask you to reduce your price.
The best way to avoid an uncomfortable situation is to price your house correctly from the start and stick to your guns. You can start with HomeLight’s online home value estimator that will give you a real world valuation in less than 2 minutes.
But before you settle on an asking price, your real estate agent needs to perform a comparative market analysis that uses the prices of similar, recently sold homes in your neighborhood to accurately price your home. The CMA is the best way to nail down what your home is worth because it takes into account nuances like the size of your backyard, or proximity to shopping and restaurants.
If you’re not working with an agent, you can keep your asking price in totally neutral territory by having the house appraised before you sign the purchase agreement. (In this case, as the seller you would have to cover the costs of the appraisal used to price your home).
If you set an asking price and your friend wants to negotiate, now would be a good time to get a real estate agent on your side who will look out for your best interests.
Do: Plan for the buyer’s home inspection and appraisal
During the course of a typical home sale, a contract is contingent on the home inspection and appraisal.
The transaction with your friend should be no different. In fact, the home inspection becomes extra important so you can feel good about selling your home without hidden issues cropping up down the line to haunt you. No surprises make for happy buyers (and lifelong friendships)!
So by no means should you (wink, wink) ask your friend to waive the home inspection, during which an inspector will evaluate your house for any major issues or safety hazards.
You should also prepare for the home appraisal as you normally would, like you were showing the home to buyers. Spend an afternoon cleaning up the yard, touch up the paint on the outside of your home, and deep clean on the inside.
Believe it or not, the state of your home can make a big impression on appraisers. And your sale is dependent on your friend’s financing coming through, regardless of your personal relationship with them.
Don’t: Waver on home inspection negotiations to avoid conflict
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 buyers for special treatment. They have the right to request you repair any issues related to water damage, structural issues, old/damaged roof, electrical systems, plumbing problems, or issues with the HVAC system—or essentially anything that poses a safety risk.
You can choose to make the repair, offer a repair credit at closing, or walk away, but act as you would as though the buyers were strangers as you navigate negotiations.
In the same vein, you should reject any repair requests to fix cosmetic imperfections or small projects under $100.
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 6-burner Viking range?
Are you taking your pool equipment with you to your new house?
Did you agree to offer a $1,000 repair credit 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?
Write all of it into the contract. A verbal agreement means nothing. Without a written record of these little details, you might end up with your friend in the driveway while you’re still packing up boxes.
Don’t: Worry about having to swap your financial details, it will all stay private
As your friend updates you about the mortgage pre-approval process, you might think you’ll need to see their full financial history, and this may have you second-guessing mixing friends and money.
Wordelman, however, says not to worry about disclosing sensitive financial information among friends, as the process will be 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. “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: Consider the tax implications of selling below market value
So you went against our advice and decided to give your friend a discount on the price of your home.
Be aware that the decision to sell your house for below market value could trigger attention from the IRS.
Say your home appraised for $350,000, and you sold it to your friend for $325,000. That’s $25,000 you knocked off is considered a “gift” in the eyes of Uncle Sam. As of 2018, after you exceed $15,000 in gifts for the year, you’ll pay a gift tax on the remaining balance (in this example, you’d have to pay a gift tax on that additional $10,000).
Don’t: Keep the fact that you’re friends with the buyer a secret
Disclose, disclose, disclose.
Anyone you hire along the way to help you sell your home will need to know that you’re working with someone you know so they 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 will need to know about the relationship.
If your friend is acquiring a mortgage through the Federal Housing Administration, you will also need to fill out an FHA Identity of Interest Certification form, and on that form one of the questions will ask about the relationship between you and the buyer.
Sell Your House, Keep Your Friend
Follow these do’s and don’ts from top real estate experts who’ve navigated these friendly deals before and selling a house to a friend can be a win-win.
In the end your buyer will feel good about giving your home a new life, and you’ll feel happy leaving the house in good hands.
Plus, if you can avoid creating any bad blood, you’ll stay lifelong friends—and who can put a price tag on that?
Header Image Source: (Simon Maage/ Unsplash)