How to Sell a House to a Friend So No One Feels Cheated: 11 Do’s and Don’ts

Do: Consider the tax implications of selling below market value

Selling a house to a friend is an example of a non-arm’s length transaction, an arrangement that may lead the parties to make an agreement that diverges from typical market terms. This contrasts with an arm’s length transaction, where the parties doing business are unaffiliated and act in their own self-interest.

Non-arm’s length transactions are legal but can create a higher risk of fraud and require correct tax allocation. They may be subject to heightened scrutiny and trigger a tax event for either party.

For example, if you offer your friend a discount on your home — intentionally or not — it may be considered a “gift of equity” subject to gift taxes.

As indicated in the Internal Revenue Service (IRS) guidelines, you can give up to $18,000 in value to as many people as you want for tax year 2024 — or $36,000 if married and filing jointly — without having to report those gifts to the IRS.

If the gift amount exceeds that guideline, you must report it so it can be subtracted from your lifetime exemption limit, which is $13.61 million in tax year 2024 and $13.99 million in 2025. Gift amounts that eventually exceed the exclusion threshold are taxed at 18% to 40%.

So, it’s best to determine how much the home is worth, either through a real estate agent’s comparative market analysis (CMA) or, more formally, by having it professionally appraised. That way, you can provide documentation to your tax advisor to determine if you gave your friend a gift of equity.

Don’t: Be lenient on the pre-approval step

If your friend plans to pay for your home with all cash, then you want to have an attorney verify proof of funds.

However, if your friend intends to finance their purchase, they should get pre-approved by a lender for the appropriate loan amount before you consider them a buyer in earnest.

Having pre-approval can save you from the frustration of going through a home inspection and appraisal process only to discover your friend can’t get a mortgage. However, pre-approval is not a guarantee to lend, and financing can still fall through.

Usually, a pre-approval can be completed in a few hours to a few days and involves verifying the borrower’s income, credit, and monthly debt obligations as a proportion of income.

Your friend would likely need to take this step to tour or make an offer on a stranger’s home, and it’s not a step you should skip, even if you have an abundance of trust that your friend will qualify for the funds they need.

Do: Think carefully about the price

Kaminsky says price negotiations among friends can go either way: “There are people that are looking to get every penny out of the sale of a property and that becomes more important than anything else — more important than the friend. Others are extremely generous and are willing to reduce the price by thousands of dollars.”

Get an online home value estimate

No matter which side of the spectrum you fall on, consider beginning the pricing process with HomeLight’s Home Value Estimator, which uses publicly available data, recent sales records, and your home’s most recent sale price to provide a preliminary estimation of the value in less than two minutes.

This can help you get oriented with current market values in your area and be a good starting point for determining your price range.

Use other tools like a CMA and appraisal

If you hire a real estate agent, they will include a CMA. This comprehensive report looks at the sale prices of nearby homes with characteristics similar to yours, then makes dollar adjustments based on competitive differences to provide a pricing recommendation.

The CMA gets more detailed than an online estimate and can account for nuances like recent upgrades, curb appeal, and issues like road noise. Aside from the CMA, a home appraisal is crucial to have an official record of your home’s worth when you sell it to a friend.

Weigh the pros and cons of a discount

It’s human nature to want to help a friend. However, selling below market value is not a decision to be taken lightly. A home is often a person’s most valuable asset. Not to mention, selling a house comes with its own expenses, including settlement fees, attorney fees, and transfer taxes.

If you’re certain that you won’t have any regrets about offering a discount, then there is nothing wrong with that, and you should be sure to file the correct paperwork regarding the gift of equity if applicable. Otherwise, recognize that price could be a point of contention and tricky to negotiate with a friend.

Over the years, Kaminsky has seen sellers reconcile their need to help a friend and receive a fair sales price in creative ways. “I find sellers are willing to discount to the level that they’re not paying it to a realtor,” says Kaminsky. “The seller may say, ‘I’ll give you 2% off because I’m getting 2% off on the commission. Then, we’re all happy.’”

Don’t: Forget about clearing the title

You must clear the title — in other words, prove ownership without any additional claims to (or “encumbrances” on) the property — before you can sell a home to anyone, including your friend.

A title company or real estate attorney will conduct what’s called a title search as a step in the due diligence period of a home purchase. A title search is a comprehensive evaluation of records, sources, and documents to identify all available and relevant title information about a particular property.

If the title search unearths issues like money owed for a remodeling project on the home (called a “mechanic’s lien” in some states), unpaid taxes, or child support liens, those issues will need to be cleared before the sale can move forward. Because title issues can take a long time to resolve, a preliminary title search is often advisable.

Do: Plan for the buyer’s home inspection and appraisal

Most buyers opt to have a home inspected before closing. And if your friend is using a mortgage to purchase the home, the lender will require an appraisal to determine the amount of funds they’re willing to provide.

Even if your friend wants to waive the inspection, it’s probably best to do the hard thing and politely insist on one. It’s extremely important for an inspector to evaluate your house for any major issues or safety hazards. A thorough evaluation empowers both parties to feel confident there are no hidden issues or agendas moving forward.

So far, selling your home to friends has allowed you to avoid the prep work involved in showings. But now, you should prepare for the home appraisal by spending some time cleaning up the yard, touching up the paint, and deep cleaning the interior. These simple efforts can help show the appraiser that you’ve taken good care of the home. Clearing clutter allows the appraiser to easily access the parts of the home they need to see to form their opinion of value.

Don’t: Assume special treatment on inspection negotiations

Even if you and your friend have agreed on a price, the home inspection opens the door for further negotiations.

Now’s not the time to offer favors or ask the buyer for special treatment. As you negotiate, consider each request as you would if you had anonymous buyers — and expect they will do the same.

Like any buyer, they can request that you repair any issues related to water damage, structural issues, an old or damaged roof, electrical or plumbing problems, or issues with the HVAC system—or essentially anything that poses a safety risk.

As the seller, you’re not required to provide any repairs, though major issues like those listed above may affect the buyer’s ability to secure their loan. More importantly, you must disclose material defects in the home, as mandated by your state law. When addressing repairs, choose to tackle the big stuff but reject any requests to fix cosmetic imperfections or small projects under $100.

“It’s important to understand what you legally need to provide to the buyer whether they’re your friends or not,” Kaminsky says. “You want to protect yourself as a seller, and you don’t want to ruin their friendship.”

Do: Get everything in writing

Did you agree to leave the washer and dryer for the buyers but plan to take the stove because it’s a $5,000 six-burner Viking range? Are you taking your pool equipment with you to your new house?

Did you agree to offer a $1,000 price discount to fix the driveway, but you don’t plan to get it repaired before you leave?

Did you ask your friend for a two-day extension after closing so that you have extra time to move out?

A verbal agreement means nothing. Be sure to document everything, even minor details, in the contract.

Don’t: Sweat about having to swap your financial details; it will stay private

As your friend updates you about the mortgage pre-approval process, you might worry about seeing too much of their personal financial information.

However, Ruth Wordelman, a top-selling agent in Colorado Springs, says not to worry about the disclosure of sensitive financial information among friends. The process is no different than if you were selling your home to someone you don’t know.

“Other than a pre-approval letter, the seller doesn’t see the full financial picture of the buyer,” says Wordelman, who is also a licensed real estate attorney. “All you see are the final numbers of what the lenders are charging them.”

By consulting with a professional, you’ll ensure that the financial information you and your friend swap is minimal and strictly for business.

Do: Be transparent about your relationship to the buyer throughout

Disclose, disclose, disclose.

Anyone you hire to help you sell your home needs to know that you’re working with a friend. With this, professionals can ensure the deal is fair and legal for everyone involved.

The buyer’s lender, along with your real estate attorney, transaction broker, or real estate agent, must be aware of the relationship.

If your friend is acquiring a mortgage through the Federal Housing Administration, you must also fill out an FHA Identity of Interest Certification form. One of the questions asks about the relationship between you and the buyer.

Don’t: Neglect professional communication

Selling a house to a friend can blur the lines between personal relationships and business deals. It’s easy to slip into casual conversations when talking about the sale, but maintaining a level of professionalism is crucial to facilitating a successful transaction while protecting the friendship. Adopt these professional communication tips as you navigate this business deal:

• Set clear expectations: Discuss your intentions openly before the sale. Ensure both parties understand the seriousness of the transaction. Then as you proceed with the deal, manage expectations by closely communicating about financing options, contingencies, and closing timeline and costs, among other things.
• Use formal communication methods: Treat the sale like a business transaction. Document discussions using emails and have in-person meetings with an agent or lawyer.
• Establish boundaries: Limit the home sale talk to specific times as much as possible to avoid constant negotiation in casual settings.
• Avoid hasty decisions: Give your friend enough time to ponder their decisions, just as you would with any buyer. Don’t pressure them into deciding on a whim, given that this is a big financial transaction.
• Manage emotions: Buying and selling a house can be a stressful, overwhelming experience. Approach conversations with empathy and patience. Have a real estate agent or an attorney mediate, especially when you run into disagreements.

DO: Sell your house; keep your friend

While it may be counterintuitive, Kaminsky says, “Treating the sale as a non-friend transaction is your best chance of a comfortable, smooth closing — and retaining your friendship.”

Do the deal right, and you could maintain a fabulous friendship, get a fair price for your home, and avoid a lot of the work you’d typically do to sell a home in the process. Nothing’s better than that, except maybe an invitation for a weekend stay at your friend’s gorgeous new home.

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