Holding Onto The House– The Buy or Sell Dilemma in Divorce

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Ah, home sweet home.  Home is your happy place where you can rest and unwind.  It is the place you selected to start your family and where you and your family make memories. There is justifiably so much sentimental value tied up in the marital home, which is why deciding on the final disposition of the home is one of the most daunting, but important decisions to make during the divorce process.

If you’ve owned a home in Massachusetts for more than a few days, chances are that it has gone up in value since you purchased it.  Massachusetts has seen its median sale price for homes skyrocket by over twenty percent in the past five years, with total appreciation rates of nearly thirty percent during that same period.  So, in addition to that sentimental value, it is also likely that your home has a lot of market value, which can be both a gift and a curse in the context of a divorce proceeding. Sure, more money is great, particularly when each party is (in)voluntarily reducing her/his total net worth by roughly half in the divorce, but these high values of real estate often dwarf the rest of the marital assets, thereby making the decision of what to do with the house even more challenging.

For the purposes of dividing assets in a divorce, determining the value of certain types of assets is not as straightforward as looking at an account balance or even finding the fair market value.  The “value” of the real estate in the divorce context is not necessarily in the fair market value, but in the equity in the real estate.  To determine the equity in the property, you need to establish the fair market value and then subtract any existing encumbrances (i.e., mortgage, home equity line of credit, lien, etc.).  To illustrate, if your cozy, contemporary Cape in Cohasset has a fair market value of $500,000, with an outstanding mortgage of $200,000 at the time of divorce, then you have equity of $300,000.  The equity of $300,000 is the figure that is subject to division in the divorce, not the $500,000 fair market value.  That said, you cannot accurately determine the equity without first determining a fair market value, which is often done in the divorce process by having a professional appraisal done of the house.

Once you determine the equity, then it is time to decide what to do with the home.  While your options are fairly limited, it does not make the decision process any easier for the reasons stated above.  Basically, you can agree that the home will be sold, or that one party keeps the home and “buys out” the other party’s equity interest in the property.

Deciding to sell the marital home can provide a much needed and clean financial and emotional break for both parties, though challenges still arise.  For example, when the parties ultimately decide to sell the home and split the net sale proceeds (the money left over after mortgage is paid, broker’s commission, closing costs, etc.), then a common challenge is that one or both parties may find her/his post-sale financial situation to be insufficient to buy back into (or rent in) the high-priced housing market in Massachusetts.  This challenge can be compounded if there are minor children, such that both parties may have to find a multi-bedroom home within a specific community or area to accommodate the housing and educational needs for the children.

Likewise, the buyout process is not without its challenges either.  Using the $300,000 equity figure in the illustration above, if the parties agree to divide the marital assets equally, then the party who is staying in the home with the $300,000 in present equity would need to buy out the other party’s fifty percent interest, which is worth $150,000 in this scenario.  The party keeping the house would need to come up with $150,000 within an agreed upon time and likely refinance the existing mortgage into her/his sole name.  If there are sufficient other assets in the marital estate to satisfy the buyout, then the party who is not keeping the home would receive an additional $150,000 from other assets (often cash) to satisfy the buyout.  If there are insufficient other marital assets to satisfy the buyout figure, then the party keeping the house may have to rely upon other sources of funds (i.e. loan from family members, a secondary mortgage or home equity line, etc.) to pay the other party in a timely manner.  Given the high market values in homes in Massachusetts, the party who decides to keep the home and buyout the other may end up in an unenviable situation in which s/he is house rich and cash poor.

There is often no perfect solution in deciding what to do with the marital home in the divorce.  As challenging as it may be, it is important for divorcing spouses to think of the marital home decision as a financial one and not an emotional one.  Once the division of assets is set forth in a divorce judgment, there is no going back to renegotiate.  Given the high values of homes in Massachusetts, the disposition of the marital home may be the single most important financial decision to make in the divorce process.  Seek the advice of trusted advisors (attorneys, financial planners, etc.) to evaluate your options before planting the for sale sign into the front lawn or deciding to take on an albatross of a mortgage by yourself.