One of the main issues that needs to be decided in a divorce is what to do with the family home. Here is an overview of the most common approaches:
Sell the Home. It is very common to sell a home as part of a divorce. This is the simplest and easiest approach, although it may not necessarily meet your family’s interests as well as some of the other options, particularly if children are involved.
Advantages of selling the home:
- It (hopefully) provides cash for each spouse. The cash can help someone get into a new home or can be used as funds for one spouse to “buy out” spousal support or to pay a property settlement.
- You do not need to decide how much the home is worth because the home will sell for whatever it sells for. In a buyout it’s important to decide how much the home is worth, which can sometimes be difficult, particularly if you have a unique property.
- It eliminates the need to remove someone from the mortgage.
- It disentangles former spouses from one another.
Disadvantages of selling the home:
- It may be important to maintain the family home for the stability of a person or the children.
- It may be not be affordable to purchase a new home and/or your new mortgage payment may be much higher than your original mortgage payment.
Buyout. A buyout occurs when someone keeps the home and “buys out” the other person’s share of the equity. This can happen by doing a “cash-out refinance” or by transferring other assets. It’s important to specify when the mortgage will be refinanced so that the other person’s name is removed from the mortgage. If the person keeping the home cannot fund the buyout and remove the other person’s name from the mortgage, the judgment typically states that the property will be sold.
Advantages of a buyout:
- It allows someone to maintain the family home for the stability of the children or themselves.
- The person keeping the home does not have to deal with moving, which can be an overwhelming process, particularly when it’s happening as part of a divorce.
- When structured correctly, a buyout may enable the other person to purchase a home so that both people have a home following the divorce. (This would also be true of selling a home.)
Disadvantages of a buyout:
- There might not be enough assets to fund the buyout. Even if there is, one person may end up with the bulk of their assets being tied up in home equity and have no retirement funds, for example.
- It’s important to determine the value of the property. Sometimes this is easy to do, but sometimes this can be challenging. People usually determine the value of the home by obtaining one or more “CMA’s” (comparative market analysis) from a realtor, or by hiring an independent real estate appraiser. Sometimes people will obtain multiple CMA’s and/or multiple appraisals and average them. With that said, you won’t truly know how much the home is worth unless you sell it.
- The person keeping the home will be responsible for all of the real estate commissions if/when they sell the home in the future.
- A refinance will be necessary if people are joint on the mortgage. If the person keeping the home is the only one on the mortgage, then no refinance will be necessary. However, a cash-out refinance might still be needed in order to pay the other person their share of the equity.
Co-ownership. People sometimes decide they will continue to jointly own a property following the divorce. Co-ownership is probably more common than you think – however, it’s also the most complicated of the arrangements.
Considerations in co-ownership:
- Are the two of you capable of effectively owning a property together after you are divorced?
- If it’s the family home, who will live there?
- If it’s a rental property, who will be responsible for dealing with it?
- How will the monthly expenses get paid? What happens if repairs need to occur? What happens if you can’t agree if a repair is needed?
- How long will this arrangement last? It’s very important that a co-ownership arrangement is very detailed so that it addresses all contingencies and describes how and when people can end the co-ownership.
Advantages of co-ownership:
- It allows someone to maintain the family home for the stability of the children or themselves for some period of time. People will often co-own a property until a child gets through a certain school.
- You may consider the property to be a good investment.
- People don’t typically need to refinance the mortgage if they are co-owning the home (although there may be reasons to do so).
Disadvantages of co-ownership:
- Both people’s equity is ‘tied up’ in the property. This doesn’t necessarily matter for the person remaining in the home, but it could prevent the other person from being able to buy a new home.
- Your credit will be negatively impacted if you remain on a mortgage and then the person who is supposed to pay the mortgage misses a mortgage payment.
- What happens if there is a disagreement or if someone changes their mind and decides they no longer want to be co-owners?
These are the most common approaches and considerations to dealing with a home in the divorce. With that said, there may be other approaches and considerations in your particular situation. Here’s the good news: Once you decide which approach makes sense in your situation, the “details” are usually relatively easy to determine. An experienced mediator or attorney can help identify and work through these details to develop a framework that makes sense for your family.