Freya’s Financial Facts Regarding Divorce
West Coast Woman
Published July 2006
Your House and Divorce
A falling to stable housing market, (depending on who you talk to) is presenting a new set of challenges and opportunities in divorce situations.
A year ago we were advising our clients to reduce real estate holdings and to not over leverage themselves on real estate. Our view was that real estate was overvalued as an asset class. Now that the tide has turned, many divorcing couples are struggling with what to do with their house.
Keep it or sell it?
There is no easy answer. If the payments can be made by one party without it presenting an undue hardship then it may make sense for that person to keep living in the house until the market is more of a seller’s market. This will be subject to other factors such as are there children and does the other party need a payout immediately.
Either way it is a big decision and you should refrain from making that decision based solely on emotion. It would be preferable to work with your soon to be ex and a Certified Divorce Financial Analyst (CDFA) to measure what the best solution is for you and your situation.
If you determine that you need to sell the house, then what is the price? Couples will sometimes disagree on what to list it at. In a sagging real estate market, pricing your house just above the market only assures that it will not get sold.
Real estate buyers are some of the savviest consumer’s around and you must assume they or their agent know the market. Pricing the house for sale gets you out, gets you cash and gets you on your way.
Downsizing; does it work?
Downsizing can work, if the thing you are downsizing is the price. If you go on to purchase a new property that is smaller but not priced lower you are not achieving much. Should real estate continue its decline then downsizing should become easier, as it has been in the past. For now it remains difficult.
You must be careful to analyze the cost of your current mortgage vs. your new mortgage and the cost of your old tax property tax costs compared to your new one, as well as insurance costs, maintenance, etc. If you are good with these types of calculation then you are ahead of the game. If not, give us a call and we can help sort it all out for you.
What is the value?
The fair market of your home may be an issue in the divorce. The party who is buying the other person out of the house wants to see a lower value; while the party that is selling the house to the other party invariably wants a higher value.
Normally you would have the house appraised. The cost for an appraisal is approximately $350. That will tell you what a bank will lend on the property but not what someone will buy it for. A property appraisal can help but is not a final solution. You could get two appraisals, but in the end you can appraise yourself silly over minor differences. Remember, in a buyout of a divorce, you are only getting 50 cents on the dollar, so it is best if you can come to an agreement. This is an area where it is helpful to come to a professional who can give you the answers to the questions you have by measuring the effect of the financial decisions you are trying to make.
Do I have to pay my spouse for the house now?
Not necessarily. If your spouse is willing to wait for the money for whatever reason, you can enter into a property settlement note to pay them at a later time. They may require that the agreement protect their rights, as they should, but it is quite common, especially in mediated divorces.
Should I rent?
Renting is not the catastrophe that conventional wisdom tells you it is. In an overvalued market, then renting is absolutely smarter. (Why overpay for a house you can buy more cheaply later?) Unfortunately the hot real estate markets of the early 2000s convinced certain people that real estate only goes up in value. That is not historically true, and there are many instances throughout history where real prices of property have declined and stayed depressed. Renting can be cheaper and easier than owning a home. One question to ask yourself is this. Can I rent a nicer home for less money than I can buy a comparable home? If so you are in an overvalued market and might consider renting if you are unsure about the ability to buy and keep paying a mortgage.
There are other advantages to renting. It is a good idea in general not to make any major changes or large purchases for a year after your divorce. This gives you time to settle down, collect yourself, assess where you are in life and where you want to go. Maybe you will end up relocating. If you do and you had bought another property right away you would have those assets tied up not allowing you the freedom to make wise choices for your future benefit.