Times are tough, and buying a house is tougher. In fact, according to the National Association of Realtors, the median existing-home price for all housing types was $188,900 in August 2016, up just 4.7 percent from August 2015’s median price of $180,800.
So if you’re lucky enough to have your parents offer to sell you their home, it may be tempting to take them up on it. Still, buying a house is one of your biggest financial investments.
To avoid making mistakes first-time homebuyers make, let’s weigh the pros and cons of buying a house from your parents.
The pros of buying a house from your parents
You already know the neighborhood
Of course, you may have grown up in the house you’re buying. But even if you didn’t, chances are you’re familiar with the neighborhood since you grew up nearby.
That means you know the quality of the schools, how safe it is, and what amenities are available. Some of that you can find out online, but there’s nothing like first-hand knowledge.
It can be loads cheaper.
Depending on your parents’ motivations for selling, they may be willing to sell you the house at a significantly lower price than its market value. Around 30 percent of parents would sell their home to a child for less than its appraised value, according to a recent Bankrate.com report.
Of course, you’ll still need to come up with a down payment and may need to get a mortgage. But a lower purchase price can mean big savings over the life of the loan.
Even if your parents aren’t interested in undercutting the competition, buying a family home may still come with a discount since many sellers are willing to accept a lower offer from a relative.
You might not need a mortgage.
Mortgages aren’t easy to come by these days. The average credit score for a conventional loan is 752, and you’ll need a score of 760 or higher to qualify for the best rates, according to Bankrate.com.
Furthermore, the average down payment for a conventional loan is 20 percent. So if you’re buying a $200,000 home, that’s a $40,000 down payment.
If you’re buying from your parents, they may be willing to finance the purchase or accept a smaller down payment. And since you probably have a good relationship with them, they may be more forgiving if you have a few dings on your credit report.
The cons of buying a house from your parents
You may feel obligated to them
If you’re buying a house from your parents, it’s likely because they want or need to sell it. And that means they may be counting on you to make the purchase.
Of course, you should only buy the house if you can afford it and it makes sense. But if your parents are in a difficult financial situation, you may feel like you have to buy the house to help them out.
It could cloud future family dynamics.
If buying a house from your parents is a good financial move, it could be great for your relationship. But if things go south, it could hurt your relationship.
For example, if you can’t make the payments and need to sell the house, your parents may feel like they lost money on the deal. Or, if you make changes to the property that they don’t approve of, it could create tension.
So before buying a house from your parents, be sure to have a frank discussion about your expectations, their expectations, and what would happen if things don’t go as planned.
It could affect your taxes.
If you buy a house from your parents, you may have to pay capital gains taxes on any profits they made from the sale.
For example, let’s say your parents paid $100,000 for the house 20 years ago, which is now worth $300,000. If they sell it to you for $200,000, they’ll have to pay capital gains taxes on the $100,000 profit.
And if you then sell the house for $300,000, you’ll have to pay capital gains taxes on the $100,000 profit. So be sure to factor in any potential taxes when buying a house from your parents.