With the way house prices are going, a lot of parents, grandparents and "adoptive family" are looking at ways to help people out to get on the property ladder. One of the ays we are seeing this happen is family members selling property they already own, to their families at discounted rates. e.g The property is worth $700K but mum and dad are happy for you to pay them $500K for it.
This is great and totally possible, but there are a few things to consider here and it is good to put some thought around it before you get too far down the track.
How should we go about the process?
Step 1:
The first step would be to decide on the market value for the property. There are two ways to do this:
- Get a real estate agent to come and give you a free appraisal on the property - Most real estate agents will come to your home for free and give you an appraisal on the value of your property. Agents normally have a really good idea of the value, especially if they have sold a few properties in the area.
- Get a registered valuation done by a bank approved valuer - Paying for a valuer to come and look at the property, check it against other sales in the area and then give you a full report is a good way to get an impartial valuation of the property. The cost will be somewhere around $800 - $1000.
Note: getting your bank or My Mortgage to order this for you will mean that if they require a valuation later in the lending process you wont need to pay for a valuation again. The banks have specific systems that valuations need to be ordered through to make sure they are impartial.
Once you have the valuation or appraisal, you can agree with your family what the market value of the property is. This is important for the next few steps, even though the amount of lending needed to purchase the property will be less.
Step 2:
Now is the time to decide on the amount that your family want for the property. For example, perhaps the property is worth $750,000 but your family want $500,000 for the property, this means that as the purchaser, they need to have a total of $500,000 to pay the person for the property on settlement day.
It's now time to get a sale and purchase agreement drawn up by a solicitor saying that the family selling the property will sell it at the full market value to the family members looking to buy the property.
Now, I can hear you screaming through your screen that you're not paying market value for the property, that is the whole point! We understand that but there is a really good reason for doing things this way. The main benefit of doing this is that from the banks point of view the value is the market value so we want to be able to use all the additional equity straight away to help you with your lending. If you were to buy the property at the lower amount, the bank would have to use that lower value as the value for at least 6 months and then would likely require a valuation to allow you to access any equity you have in the property.
So how do then buy the property if the sale and purchase agreement says $750K but you only want to pay $500K for it? The answers, gifting of equity or loaning you the equity.
Gifting or Loaning Equity
Essentially, what family are doing when they sell a property to other family members at a below market price is that they are gifting the equity in the property. This process formalises that, means there is more transparency, gives those buying the house more flexibility and they are seen as lower risk by banks as they have more equity in the property.
There is no money that changes hands though as it is purely a gifting of equity.
There is also an option where the equity could be a "loan" through a "deed of acknowledgement of debt". This is a document that says that the equity is loaned but there is no interest on the loan and there will be no repayments required until the house is sold.
We have basic loan and gift templates you can use initially but speaking to a solicitor and getting good legal advice is the best way to go here.
Where to start?
If you have a family member offering to sell you a property (existing house or bare land) for below the market value, get in touch with the team at My Mortgage and we can set you off on the right path and either connect you with a solicitor who can make sure you are getting the right legal advice, or get straight into an application and so that you can get to where you want to go.