Real Estate Assets Can Be Difficult to Divide in Divorce

Real estate a couple owns can be a real stumbling block to divorce. Property problems won't keep people together; they might even drive people apart who have in­compatible investment philosophies.

Splitting up the equity can be particularly difficult when there isn't cash available to one marital partner or the other. There are options. Let's start with the simplest and common case of the couple that only owns their home.

"Sell the house" is the first advice that friends and attorneys usually give. A sale has the advantage of helping the couple make a clean break. When the transaction closes there are only cash proceeds to divide. A 50-50 split is common.

What if one or other person wants to keep the house? The husband or wife may prefer to continue to live there, at least until after the divorce is final. I remember one case where the wife was taking a job opportunity in another state and the husband was two years from retirement. In another case I discussed recently the wife wanted to minimize the disruption in her life while the husband preferred to live elsewhere.

In these cases the first step is to determine the equity in the home. What would be the proceeds of an outright sale, after all costs and the mortgage balance are paid off?

The mortgage lender can quote a payoff and real estate companies can state their marketing fees. Title companies can quote figures for title insurance and other closing costs. The only other usual seller costs are the appraisal and survey.

What's less clear are the costs that might have to be incurred to get the property to qualify for a buyer's financing. The type of financing the buyer chooses affects the standards that appraisers and lenders will apply. If the deck railings are a little too far apart, will this have to change, or might it not get noticed? Is the trim paint sort of ok or is enough of it peeling that most lenders will insist on painting?

The other potential major cost that's hard to predict is whether the well and sep­tic systems are going to pass muster or need repair. That a system passed inspections in the past does not assure that new tests that a buyer's lender would require will produce the same result.

I remember one seller this year whose system passed when he bought the home in 1983 and when he refinanced it five years later. This year the engineer determined there is an intermittent stream, one that neither prior tester saw. The owner ended up going to considerable time and expense with more than one engineer and the Municipal­ity to secure approval to create a barrier along the edge of the "stream" that was nearest the septic drain field.

Estimating the equity that a couple could split if one keeps the house needs to consider these uncertainties. Hire an appraiser (about $500) to help establish value and note the items that lenders look for. Hire a home inspection service (about $300) to look for repair items that buyers might say must be fixed or they won't go through with the transaction. Finally, hire an engineer approved by the Municipality to test the well and septic system (about $500, plus pumping and Municipal fees).

If any of these reports show a need for corrective action, get contractor bids. These figures can be deducted from the equity that the couple plans to split. The work doesn't have to be done: the one who winds up with the house can assume the respon­sibility for taking care of these items later, having been "paid" by the divorced spouse by a division of a smaller equity.

From the time of the divorce forward the spouse with the house assumes all the risks and responsibilities of home ownership. At least the risk of surprises is minimized.

After agreeing on the equity, what if the spouse who is keeping the house doesn't have the money to buy out the spouse who leaves? This is a common problem.

It may be possible to balance the books through the rest of the property settle­ment. Considering cars and other personal property it may be possible for the spouse who leaves to end up with enough of these items to balance what the "house spouse" keeps as equity.

The other answer may be for the "house spouse" to give the departing spouse a note secured by a deed of trust recorded against the house. The payments can be negoti­ated to fit both parties needs and capabilities. The items to consider are the term of the note, whether the remaining balance is due at any particular future date, the term, inter­est rate and payment. Simple financial calculators can provide these answers for spouses who are doing their own dissolution.