Many adults will consider where their parents are, or need to be, living at some time during their lives. Finding creative ways to buy parents house can be an excellent option for families wanting to keep their family home in the family.
Sometimes this also may be necessary due to financial or health problems experienced by one or both parents. Sometimes a more favorable arrangement than the current situation presents itself.
There are several reasons why an adult may investigate “buying house from parents” and I will explore these in this article.
I will include answers to questions such as: Can I buy my parents house and rent it back to them?
Also, we will discuss the most important buying parents house benefits for all those involved, alongside risks and pitfalls that can potentially cause more financial stress and heartache than anyone would have predicted.
Let’s get straight in and explore the options.
- 5 Creative Ways To Buy Parents House
- 1. Standard Mortgaged Home Purchase
- 2. Become Their Landlord
- 3. Life Estate
- 4. Gift Of Equity On The Property
- 5. Make A Second Home Purchase
- Should I Buy My Parents’ House?
- How Do I Buy A House From My Parents?
- Creative Ways To Buy Parents’ House FAQs
- Creative Ways To Buy Parents’ House (And Is It A Good Idea?)
Disclaimer: Some of the links on here are affiliate links and I may earn if you click on them, AT NO EXTRA cost to you. Hope you find the information here useful! Thanks.
Related Posts On Saving Money On Housing
- 13 Cheap Housing Alternatives (Realistic and Cost Efficient )
- 7 Simple Tips that Will Cut Your Mortgage in Half
- How to Afford to Move Out When you Have No Money
- 5 Inexpensive Home Improvements that Will Instantly Increase Your Property Value
- Tax-Free Savings: An Easy Way to Increase Your Savings
Let’s look into some creative ways to buy a house (which obviously also includes a few creative ways to sell a house!).
5 Creative Ways To Buy Parents House
1. Standard Mortgaged Home Purchase
You want to purchase your parents’ home to live in alongside them, for them to live in without you, or for you to live in after they have moved out.
For a formal and straightforward purchase where you are applying for a mortgage and have agreed on a market-standard price for your parents’ house, these steps lay out the usual process:
- Get yourselves pre-approved for a mortgage.
- Settle on a mutually-agreed sale price with your parents.
- Bring in the relevant professionals: real estate agent, financial adviser, tax attorney.
- Ensure you have your purchase agreement or contract completed and signed.
- Formally apply for your mortgage and go through underwriting.
- Finalize the sale.
Here are some tips about to help you successfully achieve steps 1 and 3 of this process:
Get Yourselves Pre-Approved For A Mortgage – Tips
For this, you need to choose the best mortgage company for your needs.
When checking out the best mortgage companies, look for ones that offer:
- Competitive rates
- Have a good reputation (you can check review sites like consumeraffairs.com)
- Be excellent with customer and client service
Also, you can use interactive tools such as The Mortgage Reports Tool, where you can get a customized recommendation of the best mortgage for you!
Also, it is very important to study which type of loan option is best for buying your parents’ house.
In this thorough article about the best type of home loan, you can learn more about the different options.
Plus, here is a brief list of some options that could be good based on your life circumstances:
Good for first time or low-income buyers:
Good for buyers that are Mississippi veterans or current members of the Mississippi National Guard or Reserves:
Excellent option if your parents’ house is in a rural area or small town:
Note – Obviously, if you purchase your parents’ home at full market value, they don’t incur any additional gift tax, and the property sale is treated the same as any other.
You also win by saving costs on fees and agents.
Settle On A Mutually-Agreed Sale Price With Your Parents – Tips
Even if you’re buying a house from your parents, it is advisable that you communicate and are on the same page about how much the house is going to cost.
In order to avoid future problems that could arise if unexpected costs surge because you didn’t do a house inspection, or if your parents experience seller’s remorse because they thought their home was worth more.
So, this is definitely one of the most important steps to protect both your finances and healthy family relationships.
So, how to settle a fair price for your parents house?
There are 3 main popular tactics:
1. Get A Comparative Market Analysis (CMA)
This is made by a real estate agent that accesses data between similar sold houses in your area and makes a comparison.
If you want to learn how to do a comparative market analysis to be clear about your parent’s house worth, check this article:
2.Get A Home Appraisal Report
This is made by a licensed real estate appraiser that makes a professional comparison of your parents’ home to other similar sold homes in your area.
If you want to learn what is a home appraisal report and what to expect, check this article:
3.Use Online Valuation Tools
Online valuations tools are a quick way to have an approximate of your house worth.
Some of the most popular tools are:
Note- Bear in mind you should also consider the reason WHY you are buying your parents’ house.
If in the end, you are going to rent the property or remodel the house to then sell it as an investment, it would be advisable to take that into consideration when setting the price.
Bring In The Relevant Professionals – Tips
In general, these are the 3 aspects you would need help with, and the type of professional you’ll need:
- Prepare the purchase contract – The contract should be well prepared to avoid any legal issues, so it is best to hire a licensed real estate agent or an escrow officer to write the escrow instructions.
- Review the purchase agreements – In this case, this can be done by the licensed real estate attorney you previously hired, as it is also important to review the contract and that everyone agrees on the terms.
- Tax implications – Hiring a tax professional is a must to avoid any negative implications regarding taxes both for you and your parents’ finances.
2. Become Their Landlord
If your parents can’t afford to keep their current home, one way to support them is to become their landlord.
If they are in financial difficulties, you might want to buy your parents’ house and rent it back to them.
This option can bring you all the benefits of creating a rental income, but with the guarantee of knowing that you have reliable and trustworthy long-term tenants in situ.
Again, you will need to ensure that you have taken sound legal advice, especially if you plan to rent the property to them at a below-market rental price.
You will need to declare your intentions during the purchase process, as some lenders will not entertain this kind of arrangement.
It can also have tax implications, although there is a caveat in U.S. law allowing landlords to reduce the rent charged to relatives by up to 20% of the market value.
Remember that buy-to-let mortgages (U.K.) or investment property loans (U.S.) come with higher interest rates and fees than standard mortgages, so be sure to factor these additional costs into your purchase plans.
3. Life Estate
A life estate is where there are two joint legal owners of a property.
The possession of the property remains with the inhabitant until the time of their death when it passes to the second owner. The joint owners are often parents and children.
A life estate can be a way to transfer the ownership of a property from a parent to children whilst avoiding probate at the time of the parent’s death.
However, this can vary from case to case and it is vital to know the law in your country of residence before creating a life estate agreement.
There are risks associated with buying your parents’ home and renting it to them, for example, if you were to die before your parents.
Creating a life estate arrangement eliminates this risk as it protects your parents and guarantees that they can remain in the property until their deaths, regardless of who is the next owner of the home.
Medicaid Complications When Buying House From Parents
Another important setback when buying your parents’ house with this method is the possibility of being disqualified for receiving Medicaid assistance.
But…Is it possible to avoid this?
Well, I did my research and it is not easy, but not impossible in some cases.
This is a brief explanation:
If you want your parents to be eligible for Medicaid, they cannot have recently transferred assets without receiving fair value in return.
In this case, there is a penalty where your parents can’t access Medicaid for a certain period of time. However, this can be avoided ( in some states) if the transferred asset is returned in its entirety, or partially returned.
OR, if you are a “caretaker child”; someone who has lived at least 2 years prior to your parent’s institutionalization and that you provided care in that period.
If you are interested in knowing more about this and the legal implications, check out this article:
4. Gift Of Equity On The Property
Some parents choose to gift the equity in their property to their children while they are still living.
Note- Be aware that there are financial and taxation implications in both the U.S. and the U.K. when gifting equity or property.
A gift of equity is where the parents gift all or part of the equity in their property to their children.
‘Equity’ is the difference between the market value and what is owed on the property. The parents sign over some or all of the equity value to their children as a downpayment on the property.
There are very specific rules around this type of transaction and not all mortgage lenders are willing to accept a gift of equity as the deposit for the property, so be sure to research your lender thoroughly beforehand.
5. Make A Second Home Purchase
This one is a slightly different option to the above pathways, but if you are looking to purchase a new home for your parents to live in, rather than purchasing your parents’ home, the best move might be for you to purchase a second home and have them live in the property.
You might decide to take this route because your parents are in financial difficulty, or you want your parents to move closer to where you live, but property prices are proving insurmountable for them.
It also creates a property investment for you, by purchasing a quality property at the current market price, knowing you have a great tenant to move in and take care of the property.
If you have a good income and substantial assets, this could be a smart move that works well for both you and your parents.
This article details key information about second home purchases, including the how-tos, the benefits, and the risks.
Should I Buy My Parents’ House?
Firstly, we need to look at the benefits and risks, the positives and negatives of buying a house from your parents.
These will be different for everyone and can have a huge impact on whether it is a good idea or whether it is best left well alone.
Whichever of the creative ways to buy your parents’ house you settle on, make sure you get proper legal advice from a lawyer/attorney in your country/state.
You need to be 100% certain that both parties have explored every avenue, discussed every possibility, and followed every protocol before committing to the sale/purchase.
Benefits Of Buying My Parents’ House
There could be many reasons why you might be discussing buying your parents’ home:
- Buying their home enables you to help your parents financially, for example, if they are unable to keep up with their mortgage repayments, or supports their relocation to a more expensive area to be closer to you.
- Buying from your parents allows them to help you financially, e.g. offering you a below-market-value price, requesting a smaller deposit, your parents taking on a mortgage when you are not able to.
- It allows the family home to remain owned by your family.
- It’s a sound investment, e.g. flipping the property or keeping the house as a rental investment.
- It can save you both a lot of money, by avoiding fees, commission, contingencies, and more.
- It can help them to avoid Gift Tax (US)/Inheritance Tax (UK) in the future.
However, in the interests of honesty, we also need to consider the possibility that it simply may not be a good idea, or even possible, for you to do this.
Buying Parents House Risks And Downsides
- It can cause ill-feeling from other family members.
- Emotional attachment to the house can make it hard to let go: for you and your parents if you rent the property out; for your parents if you move in and make significant alterations or redecorate.
- Your parents might suffer seller’s remorse after the event.
- There could be tax implications and some work involved to avoid a tangled estate in the future.
- Make sure you don’t skip essential costs, such as lending surveys, home inspection, and relevant insurances.
- You could face future implications preventing your parents from accessing Medicaid if buying a house from parents below market value.
- The house could be repossessed if your parents declare bankruptcy in the future.
- Significant repairs or modifications arising after the sale could cause resentment or guilt between the parties.
Buying your parents’ home can be an excellent way to support your parents financially, or to keep your family home in your family.
However, don’t buy simply to ease your parents out of a financial sticky spot or out of a sense of filial duty. You need to want to purchase their home.
Lending Tree has an excellent, detailed article covering all of the steps, legal aspects, and financial implications involved when buying property from your parents.
How Do I Buy A House From My Parents?
So you’ve reached the decision and declared, “I want to buy my parents’ house!”
So what happens next?
There are a number of ways to buy a house from your parents. Traditional, time-worn ways and newer, less obvious paths that you could take.
All carry risk but can be more than worth it if you choose to go down this road.
Apart from the financial considerations, the other key aspect involved in buying a home from your parents is communication.
It is vital that the purchase of the property is completely transparent and by the book in order to ensure that no one can be accused of manipulation. Involving a third party or mediator, such as a real estate agent, is usually key for in-family transactions.
Financing The Deal: Creative Ways To Buy A Home
First things first: consider how you will finance the deal. Will you:
- take out a loan or
- mortgage from a financial institution?
What size of deposit are you bringing to the table?
Are you choosing to take the seller-financed route, where your parents are acting as guarantors of the financial aspects of the sale/purchase?
If you are planning to finance it yourselves, here are a few ways to raise or create additional funds:
- Ways to save a large sum of money
- What to do with a large sum of money
- Ways to save a tax-free sum of money
Again you must seek out sound legal advice on this, or you could find yourself living through a repossession nightmare in the future.
This article lays out the points to consider around taxation in the U.K.
And this one is excellent for U.S. readers.
Creative Ways To Buy Parents’ House FAQs
1.Is Buying Your Parents House A Good Idea?
Buying your parents’ house can be a good idea to save money for both parties, increase your credit for mortgage qualifying, and it can even be a smart investment decision.
However, there are some disadvantages such as affecting your family relationships, tax issues, and even penalties to your parent’s access to Medicaid services.
So, buying your parents’ house is a good idea if you study all the legal and emotional implications and plan ahead every step of the process.
2.Can I Buy My Parents House And Let Them Live In It Rent Free? (UK And US)?
You can buy your parents house and let them live in it, even for free. It is not illegal.
But, you still need to declare your intentions during the purchase process, as this can have some tax implications.
Also, some lenders will just not approve this type of arrangement, and for conventional mortgages, this could mean higher interest rates and fees.
So, be sure to research this with your mortgage company, and tax professionals to plan accordingly.
3.Can I Pay Off My Parents’ Mortgage Tax-Free?
If you pay off the mortgage of your parents’ house your parents won’t need to pay any gift tax.
But, you will have to file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $15,000 per recipient for 2021 in the US.
4.Can I Buy My Parents House For What They Owe?
Yes, you can buy your parents’ house for what they owe as some lenders allow parents to offer an “equity gift” to their child or family members.
This means your parents can give you all, or a portion of the equity they have of the house.
5. Should I Buy My Parents House Before They Die?
You are not obligated to buy your parents’ house before they die.
However, buying your parents’ house before dying will make the process of selling the house easier, especially if they don’t prepare a will before dying.
Plus, you can also save on taxes and make a sound investment if you flip the house and make a profit.
Whatever you decide, make sure to follow due diligence.
Whilst you are buying from close family, you would still be wise to have everything carried out legally – buying a house is still a legal transaction after all.
And make sure you have everything in writing. This protects both you and your parents should any issues arise further down the road.
Doing your research beforehand, thoroughly and wisely is vital as you look into the options detailed here.
Discuss everything thoroughly with your parents and any siblings or wider family that the purchase may affect. Ensure you have everything agreed and recorded legally.
Once you have made the decision, choose one of the creative ways to buy parents’ house detailed here. Get sound legal advice relevant to your country of residence and go for it!
Related Posts on Saving Money on Housing
- How to Live With Internet at Home and Save Money
- How to Save Up and Move Out
- DIY Small Patio Ideas on a Budget
- How to Spruce your House Up for Cheap and get Paid For your Extra Space