One of the biggest challenges a divorcing couple faces is the equitable distribution of their property. In other words, answering the question, “Who gets what?” in a manner that is fair to both parties. If you’re relatively young and don’t own a lot of property, this might be pretty simple. However, if you own a home together, it can be a little more complicated.
Here are five things you should consider when trying to decide whether to keep or sell a home during a divorce.
Can either of you afford to keep the house after the divorce?
One of the benefits to getting married is being able to consolidate living expenses. This includes only having to pay for one home. When getting divorced, the exact opposite happens—someone moves out, and living expenses go up. For example, let’s assume that after a divorce, everyone’s income stays the same. In this case, the same income must support two housing payments, even if one of those payments is for a cheap apartment.
If you had purchased a home that was reasonably within your income range, this might not be problematic. But many couples buy the biggest house they can afford. If you were one of these couples, and the mortgage and other expenses stretched your budget before the divorce, how do you think this will play out afterwards? It really depends on who wants to keep the house.
If you’re the primary breadwinner, you’ll probably be expected to make alimony and/or child support payments. Could you do this and expect to keep the house? Maybe. Or maybe not.
But if you’re the spouse who expects to receive alimony or child support payments, you have to consider this as well. What would happen to you if your ex-spouse lost their job? What if they asked to modify their alimony payments down the road because of unforeseen economic circumstances? Or simply stopped making payments? How long would your finances last before you fell behind on the bills?
Is it too much house for either of you?
If, as a married couple, you bought the biggest house you could afford, you might have to wonder whether it’s too big for the person who keeps it. After all, it’s not just the mortgage. It’s maintenance, utilities, repairs, replacing appliances…all of those costs add up.
Furthermore, if you’re the one keeping the house, you might be giving up something else as part of the agreement. Like the cash or investments you might need to keep up with the payments. In other words, you might end up house-rich, cash-poor. And if you don’t have enough income, you might not get through those tough times that every homeowner faces.
Real estate market conditions
What would happen to your financial situation if your home value dropped by 20%? Before the divorce, perhaps your finances could have weathered the storm until home prices recovered. A lot of people experienced this in 2008 with little impact because they didn’t have to sell. After all, a down real estate market doesn’t affect people who aren’t in the market.
But what if you eventually decided that you couldn’t afford to keep the house, despite your best efforts, and had to sell? What if you came to this realization just to find out that your home’s value had dropped 10-20%? Or, what if you needed to tap into home equity just to find out that it’s no longer available?
Before you decide that you’re going to keep this house, you might want to consider whether you can financially weather a real estate downturn. If you don’t know whether you can afford to keep the house for at least 5 years, you might want to consider selling it.
What shape is your house in?
Do you have a lot of deferred maintenance? Does your house need to be ‘updated?’ The truth is, almost no homeowner really knows the condition of their house until they’re getting ready to sell it. Even then, you won’t have a true idea of what you’re in for until a real estate agent gives you their honest assessment. A couple of things you’ll want to keep in mind:
- You won’t get a straight story unless you tell a real estate professional you’d like to sell your house. If you ask your friends or family, you’ll probably not get the straight story. Either they’re used to your home’s condition, or they don’t want to hurt your feelings. If you’ve lived in the home for a while, you might risk stirring up reactions like, “Why didn’t you tell me this before,” and other arguments.
With real estate agents, a funny thing happens. When you ask a real estate agent for the truth, they’ll tell you two things. They’ll tell you:
- What the house is currently worth.
- How much money it would take to get it into prime condition.
Both are equally important.
- Deferred maintenance only gets worse over time. If you know that the roof needs to be replaced and that the appliances are on their way out, that doesn’t change. It only gets worse.
- If repair and upgrades seem expensive now, they will be a lot more expensive later.
Even if one of you intends to keep the house, it’s still a good idea to have a real estate professional help you put the numbers in place. Knowing the numbers will help you keep things in perspective when dividing all of your marital assets. Which brings us to our next question:
What else are you divvying up?
In many families, the home is the primary asset. If you sell the home, it’s pretty easy to figure out how to divide the proceeds from your home sale.
What if one of you wants to keep the house? In that case, the spouse who keeps the home might be asked to forego some other marital assets, such as investments, cash, vehicles, or ownership in a family business. Depending on what other assets you have, it might be difficult to figure out each person should walk away with. In that case, having a recent appraisal or comparative market analysis (CMAs are developed by real estate agents to estimate a home’s value based upon recent sales in the area), will help you determine what’s fair.
Divorce is never easy. When a divorcing couple owns a house, it makes dividing up the assets that much harder. But before you try to figure out WHO keeps the house, it might be worth discussing whether the house is worth keeping in the first place.
Lawrence Financial Planning is here for you when you need us most. We will always give you professional advice and walk with you every step of the way. We invite you to one of our monthly Divorce Workshops. Find the details on Facebook and Instagram, or visit our website at lawrencefinancialplanning.com.