One of the biggest challenges couples face during a divorce is deciding what to do with real estate. It is also an area where people make the most mistakes. These mistakes are usually the result of emotional stress and not properly valuing the home equity.
Use these 6 steps to avoid costly mistakes with your home.
1.Determine the current value – Before you do anything, you must know the value of your home. Start with the county assessor and other online sources like Zillow.com to get a rough idea. Then, meet and discuss the value with 2-3 real estate agents. Finally, get a formal appraisal. It will cost a few hundred dollars, but it is money well spent.
2. Calculate the equity – Your actual equity in the home is what you would have after selling it. Therefore, you need to deduct what you owe on any loans as well as any needed maintenance costs, closing costs, property taxes owed, and sales commissions.
3. Identify any tax implications – Be sure to discuss any capital gains tax with your CPA.
4. Evaluate your options – There are 3: Sell, buy out by one spouse, or keep it together.
- Sell – While it may not be your first choice, it is the simplest and often the best option. Selling eliminates a joint debt and you can easily split the proceeds. The biggest challenge is getting spouses to agree on price and timeline.
- Buyout – Quite often, one spouse wants to pay the other to keep the home. It seems simple enough, but plenty can go wrong.
- You may not have enough liquid assets to cover the cost of the equity.
- You must refinance any joint loans to remove the liability of the other spouse.
- Plan to close any sale or refinancing before you complete the final decree.
- Keep It Jointly – This should only be a short-term last resort until you can do one of the first two options. Treat it like a business and put everything in writing.
5. Make a decision together – You can fight it out, but you will both be better off coming to a decision together. Remember, it should only be a financial decision at this point.
6. Seal the deal – You are not done until the house is sold or one of you has the other off title AND all loans. The most common mistake I see is when a spouse stays on a loan.
Here are three additional tips avoid trouble when deciding what to do with your home:
- DON’T let emotional attachments to the home lead to poor financial decisions.
- DON’T expect the home equity to be a silver bullet to solve other financial problems.
- DON’T value home equity the same as liquid assets like checking and savings accounts.
Just because you both agree on an option does not mean it is a good idea. Get help to get it right.