Seller Financing Family Sale - How Can I Purchase a $400K Home for $275k from Parent

[Harry Shmelts]

Hello everyone,

I have a unique situation regarding a real estate transaction within my family, and I'm seeking some guidance and advice. I hope you can provide me with some insights or share any experiences you may have had with seller financing.

Here's the scenario: A family member is willing to sell me their home, which has an appraised value of $400,000. However, they are offering it to me at a discounted price of $275,000. While this is an incredible opportunity, I'm facing a challenge in securing a loan for the $275,000 due to high interest rates from traditional lenders.

I've been exploring the option of seller financing, where my family member would act as the lender and provide me with a loan to purchase the property. I'm wondering if anyone here has experience with this type of arrangement or can provide insights on how it could work in my case.

Specifically, I have a few questions:

1. Lets say they owe $40k left at 3% would I just pick up this loan? Where would they get the $275k they want?
2. How should I approach negotiating the terms of the seller financing agreement? What aspects should I consider?
3. What would be a reasonable down payment percentage or amount to propose to my family member?
4. Are there any potential pitfalls or risks I should be aware of when engaging in seller financing with a family member?
5. What would be a fair interest rate for both parties? Are there any resources or guidelines to help me determine a reasonable rate?
6. Is there any specific documentation or legal process I should be aware of to ensure a smooth and legally sound transaction?

[Bill B.]

Make sure the seller doesn’t have any closer or equal relatives than you. They are literally giving you $125k. Would you be mad if your mom or dad gave  $125k to a nephew or niece instead of you?

Interest rate is probably around 7%? They can get at least 5% guaranteed from the bank. Problem is they’re going to get ZERO dollars other than what you give them. You’re getting pretty close to asking them to give you the house for the $30k that’s owed. 

If this isn't their primary they may owe taxes. Either gift taxes or capital gains/depreciation recapture. And that would all be based on the fair market value not a discounted family price. So they could owe $20k or more just in the discount they gave you. If it is their primary they probably only have to fill out some tax forms about gifts, but you will inherit a lower tax basis increase your future taxes. And they would still owe taxes if their "profit" is over $250k at FMV, not your discounted price.

Please be careful this could go sooo wrong. What if you turned around the next day and listed it for $400k and pocketed the $125k? You certainly could, especially if you needed the money.