The best way to buy from a close relative?

Question

Preface: Fairly new to all this.

I have the opportunity to buy a two unit property, where we currently live in both units, from my brother. I intend to purchase the property, live in one side and rent the other when he vacates. I will be buying at a discount so there should be reasonable equity after the purchase.

Assuming he won't carry a note and I will have to find financing, I'm looking to find Ideas on how to get the best bang for my buck by avoiding unnecessary fees and high interest. First, how can I avoid a broker/agent and associated fees? Second, is there a way that I can get a low interest loan other than a mortgage that I can use to pay him. I understand that once you get a mortgage, you pay the interest whether you pay it as scheduled or whether you pay it off early. Any ideas will be much appreciated.

Andrew Postell · Answer

@Kenneth McCormick I can't tell which state you are in but most states will have a standard purchase contract that you can use when purchasing a home.  You will need a title company to assist with your closing if you have never done this before.  Maybe you can lean on them to help you with what form to use.

I'm cautious on how to respond to "unnecessary" fees and "high interest".  What is your definition of "high" and "low" and "unnecessary".  To close on a property it is likely you will be required to have a certain amount of fees....even if you purchased in all cash.  Title searches, attorney (if you live in an attorney state), etc. And the standard FHA/Fannie/Freddie/VA/etc types of loans out there usually have the lowest interest rate you can find....unless you get someone to lend you a lower interest rate than those.....which is not very likely.  Those mortgage types are known to have the lowest rates and the lowest downpayment requirements.  Since this is coming from a family member they are allowed to provide a "gift of equity" when you purchase the property too.  And those mortgages have NO PREPAYMENT PENALTIES....so if you pay it off early you are not paying any extra interest.  If you pay it back quicker, you pay less interest.

I would highly suggest to get prequalified with a lender in your state.  Maybe even ask the state forum on Bigger Pockets who good lenders are to use.  Getting prequalified should be free and that will tell you what your interest rate and fees will be.  Then you can make an education decision if it's the direction you want to go in.  I hope this helps in some way.  Thanks!

Chris Mason · Answer

Hi @Kenneth McCormick,

Inter-generational wealth by keeping the real estate "in the family" is much stronger in the SF Bay Area than most places, so I've become an accidental expert in this due to consumer demand.

You actually checked all the boxes to be able to get the best financing deal possible:

- Owner occupant.

- Immediate family is seller.

- Lots of equity in the deal. I'm assuming more than 20%.

You will have to do some dialing for dollars to identify a lender that can really help you with this, but what's in it for you once you find that lender (this is your "gold standard" and when you will know you are done with the "dialing for dollars" part of your search)...

- Cash to close less than 2 grand.

- No PMI (note that this isn't the "lender paid PMI with a bumped rate" that is often advertised as "no PMI," this is literally and without ambiguity no PMI).

- Normal Fannie 30YF and not some crazy portfolio mortgage, in spite of the above two bullet points.

You will want your lender to go over what terms/conditions to include in the purchase contract. Normally the contract comes first, but in this case you're going to make the contract revolve around financing terms/conditions to check all the right boxes.

When dialing for dollars, perk your ears up for the term "gift of equity." That's the magic term that'll take care of the down payment, and I'll let your lucky lender talk to you about how you can stack a solution on top of that to take care of closing costs.

FYI that is actually not true. The portion of your payment allocated to interest is just [ balance * rate / 12 ]. The remainder goes towards paying the balance down. So as/if you pay down the balance early, you're accelerating your amortization, shortening the term, and improving the principal to interest ratio of all future mortgage payments.

Good luck, and preemptive grats on the great deal.

Stephanie Medellin · Answer

@Kenneth McCormick  As already mentioned, there is no fixed amount of interest that you have to pay on a conventional loan, and no prepayment penalties.  What's fixed is your monthly payment.  If you put additional money toward principal and pay the balance faster, a higher portion of your monthly payment will go toward principal each month compared to the original amortization schedule.  Your monthly payment, however, will not be reduced by doing this.

You can transfer ownership / complete the sale without involving a real estate agent.

Chris K. · Answer

@Kenneth McCormick

Some thoughts:

• Mortgages are mortgages. Most people end up using Fannie/Freddie loans for a duplex. They are what they are and there's not much you or the lender can do to change that. Some lenders charge higher fees than others but the differences --- in the grand scheme of things --- are fairly minimal. It's possible that I'm slightly jaded at this point after looking so many HUDs and don't care about finding the lowest fees. But I generally just go with lenders that I have worked with in the past.

• As others pointed out, mortgages are amortized. Some mortgages may have some pre-payment penalties. But as a general rule, paying more early means more money gets applied to the principal.

• For these scenarios, I would just use an attorney for the deal. Maybe work with someone who also owns a title company since the lender will require you to get title insurance. For a simple family to family transactions, it's generally cheaper to go with a lawyer than a real-estate agent/broker. Agent/brokers get paid in commission so you'll have to pay a certain percentage of your purchase price. Lawyers get paid by the hour. The work required to handle a sale of a $50k single family home is not that different than a sale of a $500k home.

Good luck!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Colleen F. · Answer

Get a contract with your brother, most state have a standard real estate contract  and you should each have your own real estate lawyer to draw up/ review the contract.      Do this especially if there are any wacky family provisions and include dates, this is not a handshake transaction.

For loans try your local credit union.

Kenneth McCormick · Answer

Thanks Andrew,

I'm in the Wilkes Barre - Scranton area of northeast Pennsylvania.

To address your question on 'unnecessary' fees and 'high interest', on the fees front I was thinking along the lines of agent/broker fees. Since we did not so far use a real estate agent and don't expect to use one, can I avoid commissions or is a broker/agent a necessary part of the equation. Again i'm new to this so not sure how it works.

As far as 'high interest' , I probably misspoke in saying high interest and meant more along the lines of not wanting to pay full interest if I were to pay down the loan early, as it is my understanding that in a conventional mortgage interest is calculated, added to the principal borrowed, and that is the amount you pay whether you accelerate payments or not.

Re-reading, I do believe you answered a question I had. It sound as if the FHA/Fannie/Freddie etc. have the possibility of no penalty for prepayment so I'll look further into these conventional loans.

Thanks for taking the time.

The best way to buy from a close relative?

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