Gifts of Equity – The Gift That Really Does Keep on Giving
By Nicole Rueth - August 8, 2019
What’s the most memorable gift you’ve ever received? Ask the same person at different stages in their life and the answers may vary. Some may say a family heirloom or piece of jewelry, for others it may be a loved one’s vintage sweater – like Dad’s retro, ‘signature’ piece.
Have you considered how memorable the gift of a HOME would be? Not a dreamy dollhouse, not a plastic Monopoly piece. A real home. Selling a home to a loved one well below its market value is considered a gift of equity, and this month we’re exploring different aspects of the gifts of equity process for both buyers and sellers.
A gift, for me? You shouldn’t have!
Gifts of equity may seem like a misnomer – gifts of equity are not true gifts or presents in the sense of a neatly-wrapped package topped with a shiny bow. In fact, physical money is never exchanged in a gift of equity transaction.
When a residence is sold to a family member for a cost significantly lower than market value, the sale is referred to as a gift of equity. The true ‘gift’ in a gift of equity exchange is the difference between the lower sales price and its actual market value. Gifts of equity sales can occur between a seller and someone they have a close relationship with, although gifts of equity between family members are usually the most common.
WIN FOR SELLERS
Why on earth, you may ask, would anyone want to voluntarily sell their home for less than it is worth? There are various reasons a seller may consider a giving their home as a gift of equity. Consider empty-nesters looking to downsize, but they want to keep the ‘family-home’ in the family by selling it to their adult children. Maybe grandparents want to make it easier for their newlywed granddaughter and grandson-in-law, who are looking to start a family, do so without seriously straining their finances. In any case, a gift of equity can truly be ‘the gift that keeps on giving’ as it is an excellent way to build multi-generational wealth through real estate.
For one, selling a home as a gift of equity could reduce costs if the family chooses to engage a transaction broker or lawyer. Gifts of equity transactions can also take less time to close, in some cases. For a hesitant buyer who is distressed by an uncertain housing market, a speedy sale may be another gift in its own right.
However, sellers are not absolved of all costs if they sell their home as a gift of equity, and there are some possible disadvantages to consider. Closing costs, transfer taxes, property taxes, mortgage payoffs are some of the remaining costs a seller should keep in mind. Though you may save on agent commissions, it is critical to have the proper documentation and protections, so having a strong team is essential.
It’s also important to note that every situation is unique, so those considering gifts of equity should work with an experienced lender to guide them through the sale and ensure a smooth process. The Rueth Team is well-versed in gifts of equity and would love to be that guide for you – and this goes for buyers, too!
WIN FOR BUYERS
A drastically marked-down sale price is not the only benefit of a gift of equity. For the recipient, in many cases, lenders can accept the gift as payment toward or a paid-in-full down-payment on the residence. Low to no down-payment can prove advantageous to buyers when shopping for a mortgage. Depending on the source of the mortgage, there may be additional criteria buyers must meet to secure a mortgage for a gift of equity.
A bonus for both buyers and sellers – building that multigenerational wealth! Receiving a home as a gift of equity is great way to establish or build on any wealth you’ve already started generating through real estate. Your loved ones have made this incredible opportunity possible for your family, now you have the option to pay it forward and help your next line of family members secure their financial future, too.
Loans, Interest Rates and Tax Rules – Oh My!
The process of buying or selling a gift of equity can seem difficult to navigate, but it doesn’t have to be. Again, loans, interest rates and tax rules vary by transaction, further emphasizing the value in working with an exceptional mortgage team whose experience you can trust.
Throughout the month of August, we’ll dive into some tips and tricks to better understand the differences in loans, interest rates and tax rules as they apply to gifts of equity. In the meantime, to assess how a gift of equity could impact your finances and determine if it is a right move for your family, give The Rueth Team a call. We are all about helping clients design a path to building wealth through real estate that is best suited to their current needs – and their future goals. Call The Rueth Team at 303-214-6393 or visit theruethteam.com for more information.
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