The current real estate market has caused home prices to increase drastically over the last few months. Many people are trying to take advantage of the hot market by selling even when they hadn’t necessarily planned on it. This issue has come up in discussions with many divorce clients recently. How can they best maximize this asset?
The home is often a person’s largest asset and deciding what to do with the former marital home when a couple gets divorced is often rife with emotional, as well as financial decisions: Do I keep the house? Do we sell the house “as is” and take whatever money we can get? Where will I live? Can I afford to buy another house? If I buy another house, will I outlive my money?
Not surprisingly, there is usually one spouse who has more knowledge of the couple’s finances than the other. Among baby boomers and seniors, this pattern has been ingrained over decades.
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When I am working with the spouse with less knowledge, these questions are always at the forefront of our discussions. I recently worked with someone, a substantial earner in her own right, who would be receiving another $150,000 annually in alimony for about 10 to 12 years. Her post-divorce assets (aside from their house) would total approximately $2.5 million, most of which was in retirement funds. The former marital home was worth another $2.5 million, and there was a small mortgage on the property.
Despite her wealth and the substantial assets she expected to retain, she was still worried about her financial wellbeing after her marriage ended. Questions related to her home were very much on her mind.
Additional Reading: When Unmarried Older Couples Buy a Home
When getting divorced, a couple has limited options about what to do with their house, and each of the options has pros and cons. The most common solutions are that one spouse keeps the house and buys out the other spouse’s interest, or the house is sold and the proceeds are split. But, how does that work and are there other options? Let’s take a closer look.
1. One spouse keeps the house with a buyout.
In order for this option to work, the parties must agree on the value of the house. Value is most often ascertained by having a formal real estate appraisal done. A common solution when one party is unhappy with the appraised value is to have multiple appraisals done and use the average as the agreed-upon value. I recommend to clients that, even if the other spouse is going to be keeping the house, they make it as easy as possible for the appraiser to do their job and allow full access to the property rather than have the appraiser rely only on looking at comparable sales. This will usually maximize the value.
If a spouse is going to try to keep the house, I also recommend that they start by speaking with a lender to determine if they can qualify to refinance the property into their own name, and whether the new mortgage payments will work with their single income (and any support they are receiving from their ex-spouse). Oftentimes, this conversation makes the decision about what to do with the house much easier. If they can’t afford it, the house gets sold. Or they are reassured that they can afford it. If a buyout is going to occur, the property gets refinanced into one spouse’s name, the other spouse gets more of other assets to balance the scales, and the issue is resolved.
If, however, the parties can’t agree, or the spouse who wants the house can’t afford it, then…
2. The house is sold.
There are decisions to make here, too: Who should be hired as the realtor? When should the house be listed? Does it make sense to hold on to the house until the youngest child graduates college and sell it then? Is one spouse entitled to more of the proceeds?
Ultimately, a court is likely to order the former marital home to be sold if the parties cannot decide on another solution. For many, selling the house allows for a clean break, both emotionally and financially, from their ex-spouse. It also affords them the freedom to reinvest their money either in different real estate or other assets for retirement.
3. Co-ownership continues.
Some divorcing couples do choose to continue to co-own their homes together. I have had clients agree on a “sell by” date and who will use the house until that time. Often it is one or both parents with the children. When it is both parents, they often rotate in and out of the house for their parenting time. This is a more common option for people whose youngest child is close to graduating high school or college, which are natural times of transition, especially since it is only going to be a short period of time they’ll have to co-own the property with a former spouse.
Other clients have continued to co-own their real estate as an investment. They agree who has use of the property (sometimes it is rented out to a third party), who is responsible for what costs, and what happens if one person no longer wishes to co-own.
So, Which is Best?
All of these options have pros and cons. When discussing whether or not to sell the house or try to buy out their spouse, we often go back and look at their goals they set early on in our work together. Some of the questions we look at are:
- Do you have enough liquidity?
- Even if you’re qualified to refinance the property, can you afford the monthly mortgage payments?
- What other assets will you have post-divorce?
One thing to consider when contemplating buying out a spouse’s interest in the former marital home is that the funds from the buyout will have to come from somewhere. Most often, that means either securing financing so that a former spouse can receive a check when they sign over the title or giving them more of other assets, such as a larger share of the joint retirement funds.
Advisors Can Help
These decisions should not be made lightly or without input from a financial advisor. Many advisors I have spoken with like to see clients finish their divorce with a variety of types of assets.
Having an advisor weigh in on the ultimate division can be helpful. The decisions someone might make in their thirties or forties are not the decisions they might make in their fifties or sixties, when they’re about to retire or have recently done so. Older clients may also be factoring in other large expenses such as paying for a child’s wedding.
My client above? She and her spouse decided to hold on to the house until their youngest graduated college 12 months from the time of the separation agreement. She would remain in the house until that time and they would equally share the expenses of the upkeep. Then, the house would be listed for sale by a date certain. This åallowed her to focus on only the next 24 months of her post-divorce life, rather than being concerned about the long-term. She would have another large influx of cash when the house was sold and her financial advisor was able to leverage that money to work for her.
If the parties can’t agree what to do about their real estate, then a judge will have to decide. Judges like to see the parties have separation between them and will, most often, order the property to be sold and the proceeds split. Ultimately, if parties can agree what to do about their real estate, they will be better off (and often will spend less in legal fees!).
Attorney Amanda Shuman focuses on family law at DangerLaw, LLC, Newton, Mass. She can be contacted at firstname.lastname@example.org.