Selling a house below market value is okay, however, be sure to follow the IRS guidelines when selling to a family member. If you are selling due to substantial repairs or emergency reasons, fill out the form below!
Can I Sell My House Below Market Value?
Although a home sale is typically made for profit, there are instances when selling below its current market value might make more sense.
Technically, a home seller has the right to price a property the way they want to. This means they can sell the house below market value if they want a faster sale, they're selling to family members or friends, the house isn't performing well in the market, they're experiencing financial hardship, or they simply want to dispose of the property.
If you need more guidance on selling your home below fair market value, you landed on the right page. Here, we'll look into all the aspects of pricing your home when you are selling due to the reasons we shared above.
What is Selling Below Market Value?
Selling below fair market value means pricing your property below its perceived cost. The market value of your home is estimated by conducting a comparative market analysis of comparable homes. Moreover, the home's fair market value is often identified when buyers put in their offers.
Note that when you sell below fair market value in an open market, you still have to pay for closing costs which include title charges, property transfer taxes charged by local governments, escrow, attorney fees, capital gains taxes, etc. This is why it isn't always suggested to sell low on the traditional market.
Meanwhile, when a cash buyer gives you an offer that is below fair market value, you won't have to pay for any closing costs, repairs, agent fees, or any soft costs like handling open houses and lender delays.
What's the Difference Among Market Value, Appraised Value, and Assessed Value?
Many homeowners get confused when pricing their home thinking that the market, appraised, and the assessed value of a property are the same.
A home's fair market value is the price your property would sell for on the real estate market under typical conditions.
Meanwhile, the appraised value of your home is determined when a professional appraiser visits your home, runs comps, and checks your home's features, including its location and condition. They provide you with an appraisal report which can be the basis of your home's listing price.
Although the appraised value is often considered the most accurate basis of a home's fair market value, we cannot discount the fact that the accuracy of the report would still depend on the appraiser's knowledge of the real estate market and the neighborhood in which the house is located.
As for the assessed value, we cannot use it to determine the home's fair market value since it is usually lower than the appraised value. Local tax assessors identify this value to calculate how much you need to pay in property tax and capital gains tax when you sell your house to a family member or in the local market.
Can I Sell My House Below Market Value?
Yes, you can sell your house below fair market value if you want to or if it is suggested by your real estate agent. There are many reasons as to why this move makes sense, but selling faster is usually the main reason for many homeowners.
Note that selling below fair market value doesn't always mean that you will set the value of your property. If you sell to a cash buyer, you'll probably receive a below market cash offer since they'll buy your house as-is, and they'll make the repairs for you.
Reasons to Sell a House Below Market Value
It is not unusual for buyers to price their home below market value due to personal motives and circumstances. In fact, this happens all the time.
Here are some of the reasons why home sellers price their property below market value:
Sell the House Faster
Listing the house below market value is a strategy to sell a home faster. This is often done by home sellers who are more concerned about the timeline of the sale instead of what they'll gain.
Most of the homeowners who decide on a lower home's sale price need to free up home equity to use for some expenses, relocate for work, and other personal reasons.
In many cases, even if the house has a lot of issues that you did not address, you'll still get a lot of offers if the market is hot. However, you have to price below fair market value.
On another note, if the market is neutral, this strategy would also work, as well as in the downturn market, where buyers look at the price first.
Selling to a Friend or Family Member
At some point, you may want to sell your house to a family member or friend. To give them a discount, you sell the property below fair market value and do not ask them for a down payment.
While this is possible, the IRS may also take a closer look at the sale, especially if you sell a home to a family member on a non-arm's length transaction. They usually consider this as a sale to protect your own self interest.
For many years, selling below fair market value has been used to avoid capital gains tax, inheritance tax, and gift tax in family home sales. Thus, the IRS and other federal agencies consider it a red flag when a real estate transaction is between family members. It is assumed that these real estate transactions exist to protect family wealth.
Therefore, if you sell your house to a family member in an arm's length transaction, it must be proven that you aren't acting to protect the family's wealth and aren't evading capital gains taxes. The sale should proceed just like other typical home sales, although you are selling below fair market value.
If done right, a non-arm's length transaction to sell your house to a family member is considered legal by the IRS. You only have to file for a gift tax return.
Meanwhile, if not, the seller and buyer may face potential tax implications. We'll discuss more of this in the later part of this article.
Poor Performance on the Real Estate Market
Another reason why homeowners price their property below market value is its poor performance on the real estate market. This may be due to incorrect pricing or the current state of the housing market in the area.
Pricing a house is quite complicated and it may be inaccurate if the houses used for comps are not in the same condition as the property being listed. If the offers come in and are way below the listing price of your property, you may have to make a price reduction since there's a high possibility that you have set an unreasonable asking price.
You will also receive consistently low offers and your property will be listed for an extended period if the real estate market in your area is slow. Sure, you can wait for a great offer, but this can take a long time. If you want to sell right away, you should price your property lower.
Financial Issues
If your home is already fully paid, but you are experiencing financial issues due to job loss or other personal problems, putting it up for sale is probably a solution you've thought of.
While this can very well provide you with enough funds to recover from financial distress, there's no guarantee that you'll be able to sell right away. This is when selling below market value might make more sense.
Note, however, that selling below market would only be beneficial if the amount you need is still below the price you've set. If not, you're only putting yourself in more financial hardship on top of losing your home.
Inherited Property
People who have inherited a property, especially if it is a hoarder home or fixer upper, would want to dispose of it as soon as possible. They don't really care if they profit from the sale or not, so long as they become free of the responsibility of property ownership. This is a common situation for selling below market value.
Property is in a Bad Location
You can fix damaged roofing or flooring, but not a home's bad location. If your home is near a landfill, a freeway, or a commercial zone, it would be difficult for you to find buyers in the local real estate market. You have no choice but to price your property below market value if this is the case. Depending on how bad the location is, you may even see no profit from the sale.
Downsizing
If the owners of the property are old, they may want to downsize or transfer into a retirement home. The proceeds of the sale don't matter as much as selling their property fast and moving on.
Bad Tenants
If the home is an investment property and the tenants are difficult to deal with, it makes sense to put the house up for sale. And since with it comes the bad tenant, the home should be priced below market value, so someone would take an interest in it.
Things to Consider When Selling a House Below Fair Market Value
When choosing to sell your home below market value, there are a number of considerations to weigh, which range from simple factors to serious legal matters like taxes. Understanding these considerations will tell you if pricing your property below its fair value is really a route you should take.
Proper Valuation
One of the reasons why some properties don't sell on the real estate market is their listing price. If a comparative market analysis (CMA) is not done correctly, chances are, you've set a purchase price that is way above the home's fair market value.
That said, before setting a below market purchase price, ensure that you have identified the accurate value of the property. If possible, have the home appraised. Professional appraisers do more than a CMA. They also do an on-site inspection and look into current market trends.
The appraisal report is a good basis for the fair market value of your property. From there, you can adjust the purchase price slightly lower if you want to sell fast.
Negative Equity
Your house has negative equity if its value is less than what you owe in mortgage. This means if you sell below your home's market value, you are at a total loss— you won't be able to pay your loan in full and you will lose your dwelling.
In case of negative equity, a short sale is also an option. However, it is not suggested to sell below the already "low" market value in a short sale since you need to pay off your mortgage with the proceeds.
A short sale should be approved by your mortgage lender since you are generally asking them to forgive the remaining balance of your loan due to negative equity. They may ask you for evidence of hardship or any documentation proving your current financial distress.
Taxes
When you sell your house to a family member and give them more than a 25% discount on the home's market value, it can be considered a gift by the IRS. They can then collect a gift tax from the controlled transaction, which really is problematic if you just want to help your family member.
To avoid paying a gift tax in non arm's length transactions, consider selling your home at $15,000 below fair market value to your family member. It is the IRS gift tax exclusion limit annually.
Alternatively, transferring ownership of the property to your family member through a quitclaim deed is also an option if you don't want to pay taxes related to gifting. After you've done the transfer, that family member can take out a Home Equity Loan and pay you the original discounted purchase price you offered them.
There are still some tax implications to this, so it's best to ask for the help of a tax professional.
You can also sell your house to a family member through seller financing. This will make the purchase of your home more affordable.
Disadvantages of Selling Your Home Below Market Value Through a Real Estate Agent
Pricing the property below market value is a controversial strategy used by many real estate agents.
While this works in certain circumstances in a traditional sale, it also has disadvantages. This section goes into detail about the three most common disadvantages of selling below market value.
Property is Stigmatized
If your real estate agent urges you to lower the purchase price of your property to start a bidding war, chances are, your property will be stigmatized. This is especially true if your property is in perfectly good condition.
Potential buyers might think that you've listed the property for a very low purchase price because of a significant issue that you don't want to disclose. When this happens, they would rather not give you an offer.
On another note, some buyers recognize that this is an actual marketing strategy that is used to get more offers. They know that they would have a lot of competition should they take an interest in your property, so they skip putting in an offer altogether.
Another possible issue when a property is stigmatized through pricing low is that buyers become afraid of trusting the seller. They argue that if the seller can use such a strategy, they can deceive them through the entire deal.
Offers Would Be Extremely Low
Even if the real estate market is hot, it is rare to receive an offer that is higher than your listing price (unless via an escalation clause). Thus, when you price your property below market value, expect that you'll get even lower offers.
A strategy made by many FSBO sellers and real estate agents when this happens is that they update their listing, stating that they'll only accept offers at or above the listing price.
While this may work, there's also the possibility that potential buyers will feel deceived since there's no flexibility in the offers allowed in the real estate transaction.
You Still Have to Pay Commission
When selling your home below market value, you should ensure that your listing contract or service agreement with the real estate agent says you would only pay a commission based on the below market purchase price you've set.
Some listing contracts are misleading. There are instances that even if you don't accept an offer that is similar to your asking price, the real estate agent asks for a commission as if you have accepted it.
Seller Protection When Selling Below Market Value to a Family Member
Selling a house below market value to a family member is far different from selling to a stranger or a cash buyer. This transaction requires more vigilance and consciousness on your part, lest you want to face legal implications or suffer financially when the home sale comes to a close.
Here are some ways to protect yourself if you are selling a house below market value to a family member.
Make Sure You Put Everything in Writing
Word of mouth means nothing in the eyes of the law. If you want everything to be perfectly legal, put everything in writing, even if you are selling your home to a family member.
Note all the significant terms and conditions of the sale so you can avoid misunderstandings as the sale progresses. This will also make things smoother and easier for the title company you'll choose.
Comply With Tax Laws
Tax laws when selling to a family member can be complicated in a non-arm's length transaction. We suggest seeking the assistance of a real estate attorney, tax attorney, or tax professional to understand capital gains tax, gift tax, and inheritance tax.
Pay Gift Taxes
Always comply with the gifting laws of the IRS when you sell your house to a family member. To avoid any issues, ensure that the discounted amount is not more than 15% of the home value, so you don't have to pay gift taxes.
Commission a Home Inspector and Appraiser
Even if you are not selling your home to family members with the help of a real estate agent, you should still have the home inspected and appraised. This will benefit both you and your relative who is buying the property.
A home inspector can point out everything that needs repaired in your home so you can take the necessary actions. If you don't do this and something happens (roofing or wall collapse, flooding, etc.), chances are you will be blamed by your relatives.
A home appraisal, on the other hand, will identify your home's value. This will be the basis of how much the discounted price will be when you sell your home to a family member.
Don't Let Emotions Get in the Way
We understand that you want to sell your home at a bargain price to help your family member. But we strongly suggest that you don't sell your house based on emotion.
Consider it as a normal house sale, although you are selling a house at a discounted but fair price. This is so you don't regret anything in the future, especially possible financial ramifications.
Use logic more than emotion when selling a home to a family member, and make the home selling process as formal as it should be.
Sell Your House Below Market Value to a Cash Buyer
If your goal in pricing your property below market value is to sell fast because you want to downsize, get rid of bad tenants, or avoid dealing with the maintenance of an inherited property, it may be more beneficial to sell your home to a cash buyer.
Compared to listing your house below market value in a multiple listing service (MLS), selling your home to a cash buyer has more security. It is also a lot faster since there is no mortgage lender involved. Some cash buyers even close in as fast as seven days.
In addition, you won't have to stress yourself out by setting a below-market sales price that you would still profit from. Cash buyers would set the fair price for you through their offer.
Although you can expect that you won't get as much money as a traditional sale, you won't have to make any repairs or renovations since they'll buy your house as is.
Cash Buying Process
To sell your home to a cash buyer, you only have to go through 3 basic steps. First is to ask for a no-obligation cash offer through the cash buyer's website or through the phone. They'll then schedule a visit to your property so they can inspect and formulate a more accurate offer.
If you accept the fair all cash offer, the deal is made official by a contract signing. It's hassle-free in most cases since the contract is sent electronically.
After the signing of the contract, the sale would proceed to close and you'll get the cash in your bank.
If you plan to sell below market value, a cash buyer can save you from the hassles. Selling traditionally and getting a fair all cash offer is pretty much the same in profit when selling below market value. But cash sales close faster and it is inarguably less risky.
Final Thoughts: Can I Sell My House Below Market Value?
Selling below market value is a common strategy in varying circumstances. Done correctly, this can lead to a successful sale. But if not, your property may sit on the real estate market for an extended amount of time.
To avoid all the hassles of working with a real estate agent and listing the property below its fair market value, we suggest exploring all of your options including cash buyers.
Here at Sell My House Fast, we give fair no-obligation cash offers to homeowners who want to sell their burdensome houses fast. We also cover closing costs, so it won't be an additional financial burden to you.
If you are ready to see what we can offer for your house, fill out our form below or call us at (844) 207-0788.
