Gift of Equity: Is it Worthwhile for the Buyer and the Seller?

A well-established way to give a financial leg up to a loved one, a gift of equity involves selling something quite substantial to that loved one at a price that is well below recognized market value. Read on for answers to some of the most commonly asked questions about gifts of equity that involve property transactions.

What is a gift of equity in real estate?

Gifts of equity are frequently associated with real estate transactions. The first step toward making a gift of equity for a loved one is getting an accurate appraisal of the home or other property that will change hands. With this appraisal in hand, you are then ready to bestow your equity gift by determining a specific sale price that falls below the property’s appraised value. If you want to calculate the monetary value of your gift of equity in its entirety, you need simply subtract your sale price from the appraisal amount.

Is a gift of equity a good idea?

As long as the seller can afford it, a real estate gift of equity generally provides a win-win situation for buyer and seller alike. The buyer gets an opportunity to own property with a significantly reduced down payment, while the seller gets to give something meaningful to a loved one. Even better, the typical gift of equity will generally insulate both the buyer and the seller from immediate negative tax implications.

Who can give a gift of equity?

In general, gifts of equity take place between parents and their children or grandparents and their grandchildren. But most conventional lenders also extend gift of equity eligibility to married spouses and domestic partners as well as individuals who are engaged to be married. Gifts of equity are also widely open to all types of blood relatives as well as the legal guardians of children even if they are unrelated by blood. Certain lenders, such as the federal government enterprises Fannie Mae and Freddie Mac, allow gifts of equity for an even wider range of candidates.

How do you ensure the legal validity of your gift of equity?

Different states and legal jurisdictions in the United States have different regulations when it comes to making sure that your gift of equity is recognized as authentic and valid. Beyond your standard real estate sales agreement (which should clearly stipulate all final property sales amounts), you should draft and sign a document that clearly acknowledges that the equity provided is a free and intentional gift.

While the requirement for official notarization on these sales documents might vary from place to place and situation to situation, most experts recommend seeking out a notary public to authenticate all documents that relate to your gift of equity. You simply cannot beat the high level of legal verification that a notarized document provides.

For more information about the value of the right documents and the power of the real estate notary, contact a representative of First Class Signing Service today.