A Step-by-Step Guide to Buying a Home from a Family Member

Buying a house from a family member is a unique transaction. Whether purchasing your childhood home from a parent or a cozy investment property from your aunt, these transactions often carry sentimental value. Under the right conditions, they can also be easier to navigate than traditional real estate deals. 

However, this isn’t just a handshake-over-Thanksgiving-dinner arrangement. Regulatory red flags, family dynamics, and potential tax implications mean you must tread carefully. Buying a house from a family member is considered a non-arm’s length transaction, which involves special considerations due to the pre-existing personal relationship between the buyer and seller.

Walk through exactly how to buy a house from a family member in a way that remains fair to all, is legally sound, and is stress-free for everyone involved.

Benefits of Buying a House from a Family Member

Before we get into the nitty-gritty, here’s why buying a home within the family is such a win-win:

Potential Cost Savings

Family members might sell to you at a reduced price or offer more favorable financing terms. They may even offer a “gift of equity” by discounting the sale price and writing off the difference as a gift. Some family members may be willing to do seller financing at interest rates lower than current market rates.

Additionally, family members may offer an outright cash gift to help with closing costs or down payments. The family member must provide a gift letter to lenders to confirm that the cash gift is not a loan, facilitating the home-buying process.

Plus, since you’ll handle the transaction “in-house,” you could eliminate additional fees, such as real estate agent commissions or home inspections.

Smoother Process

You can skip the drawn-out negotiations and jumping through hoops with external buyers or sellers. You can also avoid calling your agent so they can call the other party’s agent to convey questions and messages. The point of contact is likely saved in your phone. The details can be hashed out face-to-face on the front porch or on a weekend call.

Keeping the Home in the Family

Sentimental homes—like the one where everyone gathered for Nana’s famous Sunday roasts—are part of the family legacy, preserving memories and history. Family members know that the home’s emotional value will be carried on by its new owner.

Drawbacks of Buying a House from a Family Member

Yet, even these perks require careful management. Without clear processes in place, sorting out money and property within a family can quickly go awry. Be aware of what can crop up during these real estate transactions:

• Emotional Complications: Real estate transactions can be stressful. Adding family dynamics into the mix can amplify this stress. Disagreements over the purchase price, terms, or property condition can strain relationships, even with other family members not involved in the deal.
• Financial Risks: Without a clear, professional appraisal, you might end up overpaying or underpaying. That opens the door to financial disputes. Additionally, if the transaction isn’t handled correctly, it could trigger tax liabilities for both parties.
• Legal Issues: Informal agreements or misunderstandings can lead to legal complications later. To avoid potential pitfalls, have all terms documented and reviewed by a real estate attorney.
• Price Tag: The selling family member may expect the purchase to buy the home at least at fair market value. That means no real cost savings for the buyer.
• Home Condition: Some legacy homes may require significant renovations or upgrades to make them safe or up to modern standards. These renovations add to the costs, and besides the emotional implications of modifying a family home, they may not be worth it if the seller won’t budge on the purchase price.

To navigate these challenges, maintain open communication, set clear expectations, and involve professionals to ensure everything is handled correctly. You can buy a home from a family member in a way that protects your relationships.

Understanding Non-Arm’s Length Transactions

A non-arm’s length transaction is a real estate transaction between parties with pre-existing relationships, such as family members, friends, or business associates. These transactions differ from arm’s length transactions, where the buyer and seller act in their own self-interest without any relationship influencing the deal.

Non-arm’s length transactions can be more complex due to potential conflicts of interest and regulatory scrutiny. For instance, lenders may require additional documentation to ensure the transaction is fair and at market value. The IRS also closely monitors these deals to prevent tax evasion through undervaluation or overvaluation of the property.

Understanding the nuances of non-arm’s length transactions is crucial to complying with all legal and financial regulations. Consulting with a real estate attorney and other professionals can help you navigate these complexities.

Step 1: Decide on the Sale Structure

Before the contract stage, it’s critical to map out the sale:

• Gift vs. Sale: Is the home being gifted, partially gifted (via discounted price), or sold at full market value? Each choice has unique legal and tax implications.
• Mortgage or Cash Purchase: Are you securing a traditional mortgage through a lender, or will the family member finance the deal directly? Lenders often scrutinize family sales more, so include all appropriate paperwork!

Setting up clear terms from the beginning keeps everyone on the same page and prevents misunderstandings and unnecessary stress.

Step 2: Structuring the Deal with Family Members

When structuring a real estate deal with family members, work to keep the transaction fair and transparent for both parties. Take steps to define:

• Fair Market Value: Have the property appraised professionally to determine its fair market value. A professional appraisal establishes the property’s true value, meaning no “I think it’s worth” conversations. Unlike an arm’s length transaction, a non-arm’s length transaction requires additional scrutiny to ensure the property is valued correctly. This helps avoid pricing disputes and ensures compliance with tax regulations. Undervaluing the home could trigger gift tax liabilities or raise red flags with the IRS.
• Clear Terms and Conditions: A formal purchase agreement outlines all terms and conditions of the sale, including the purchase price, payment terms, contingencies, and closing date. 
• Legal Protections: Both parties should have their interests protected through legal documentation. Involving a real estate attorney to draft and review contracts verifies that everything is legally sound.

Addressing these factors can create a fair and equitable deal that protects both parties and maintains family harmony. Don’t just rely on verbal agreements because “they’re family;” writing it down as a formal purchase contract keeps it clear for all.

Step 3: Bring in the Pros

Contrary to what your Do-It-Yourself sister might say, you’ll need professionals to avoid potential pitfalls:

• Real Estate Attorney: To draft contracts and protect both parties. A real estate transaction is a business relationship. Laws and regulations must still be followed. An attorney helps verify that legal aspects are covered to legitimize the sale.
• Title Company: To manage title searches, ensuring no hidden claims against the property. Even if the property has been in the family for a long time, a title search may verify no additional claimants to ownership.
• Escrow Agent: To securely handle earnest money and payments. Think of them as a neutral third party keeping all financial dealings above board.

Spending a little now on professional guidance can save a lot of headaches down the road.

Step 4: Use an Escrow Account

An escrow account is essentially a financial middleman that ensures all funds—including down payments—are distributed fairly and according to the agreement’s terms. It’s also where fees (think HOA dues, property taxes, or repair costs) are transparently handled.

Choosing a reliable escrow service adds another layer of protection for both the buyer and seller.

Step 5: Secure Financing (If Needed)

If you need a mortgage, communicate with your lender that this is a family sale. Many lenders require additional documentation to confirm that it’s an “arm’s length transaction.” Lenders also require additional documentation for non-arm’s length transactions to confirm that the transaction is fair and at market value.

Special Considerations:

• Gift of Equity: If the buyer receives equity as part of the deal, your lender must calculate this appropriately to meet loan requirements. The documentation must state that the seller does not expect any compensation in return. Additionally, some home loans have specific requirements around gifts of equity. Your mortgage broker should explain what these are.
• Seller Financing: If the family member acts as the lender, be sure all repayment terms are clear and legally binding. Avoid any “just pay me whenever” agreement). This is another area where having an attorney formalize the repayment terms saves family relationships.
• Loan Application: Home loans require the buyer to still meet the underwriting requirements. That means having a low debt-to-income ratio, reliable income stream, a down payment, and a solid credit score.

Step 6: Conduct a Home Inspection & File Disclosures

Buying from family doesn’t mean skipping an inspection. Even beloved Uncle Joe might not be upfront about the leaky skylight in the sunroom. You don’t want to start family drama because the home’s condition was unclear when purchasing.

• Home Inspection: Evaluate the property thoroughly to avoid issues after the sale. Even when buying a family member’s home, a thorough inspection is crucial to avoid future conflicts and ensure the property’s condition is as expected. Additionally, the condition may impact the property’s market value. 
• Legal Disclosures: Ensure all known property issues are disclosed in writing. This avoids future conflicts and provides peace of mind for both parties. Family members should also be transparent about repairs or issues they have experienced in maintaining the home.

Step 7: Closing the Deal

Once finances, legalities, and inspections are sorted, it’s time for the big day:

• Final Walkthrough: Ensure the property’s condition hasn’t changed since you signed the purchase agreement.
• Title Transfer: Meet with the escrow agent on the appointed day. Work with your attorney and title company to officially transfer ownership.
• Sign on the Dotted Line: Complete signing of all final paperwork. Don’t forget to bring your ID and funds for closing costs. You’ll sign the property deed and any mortgage-related paperwork and pay the fees.

Congrats! You’re officially a homeowner—and keeping it all in the family.

Additional Things to Know

All home sales have taxes. Working on a family sale doesn’t change that, but it could raise issues not present in typical real estate transactions.

• Gift Tax Liability: If the seller discounts the sale significantly (as with a gift of equity), they may owe gift tax if they exceed the annual IRS exemption limit. That was $19,000 per individual for 2025, with a lifetime limit of $13.99 million. Additionally, if a family member provides a cash gift to help with the purchase, it may have tax implications and should be appropriately documented.
• Capital Gains Tax may apply if the seller isn’t living in the home as their primary residence or if the home has appreciated significantly. For instance, if you purchase a family member’s vacation home, the seller may profit from the sale. However, for primary residences, capital gain tax exclusion may apply. The family member selling should consult with a professional tax attorney.

Consult a tax professional to clarify how the transaction impacts both parties. It’s better to be safe than to owe Uncle Sam.

Final Takeaways

Buying a house from a family member can be a fantastic way to secure a dream home and pass down family heritage. But success—financial and emotional—hinges on handling the transaction professionally.

To summarize:

1. Have open, honest communication with everyone.
2. Hire qualified professionals to guide the process.
3. Always dot the i’s and cross the t’s with legal, tax, and financial documentation.

Do it right, and you’ll have a not-so-humble family abode to cherish for years to come. Now, who’s ready to host the next family reunion?