Divorce and Real Estate
Pota was recently interviewed by Divorce Guru Kim Hess on how to handle real estate during a divorce.
Making the right financial decisions regarding property in a divorce depends on asking the right questions. What are some of the questions that someone in a divorce should be asking?
Yes, it’s important to ask the right questions and to know which professional to ask.
- What are the real estate assets? An accurate assessment needs to be made of what properties are owned (as well of course as other assets but today we are here to discuss real estate). Your house is probably the most important asset of the marriage. It can drain marital assets with litigation or can provide for financial security through agreement and cooperation.
- How are the real estate assets to be divided? This question is to be answered by the divorcing spouses with the help of their attorneys, financial planners and accountants. The current value of the real estate will be a key factor in how it is to be divided, and a realtor can help give an accurate idea of what this current market value is. We have prepared broker price opinions on several occasions both informally and formally.
- What are the options with the house?
1. Sell and split proceeds. This is often the easiest option, especially when there is 1. substantial equity tied in the house and 2. the mortgage payments would be too much for one person.
2. Keep the house-one spouse may wish to buy out the other and keep the house. With the help of a financial planner and accountant, the spouse making this decision will figure out if they will have the resources to maintain the property and pay the mortgage. The mortgage payments, taxes, and insurance should be no more than about 40-45% of the gross income. So if the mortgage is $3000 mo, the taxes $800/mo and the insurance is $200 /mo, this means the total monthly payment is $4000/mo which is 40% of $10,000/mo. So that is what the monthly income should be to be able to pay the PITI (principle, interest, taxes, insurance). One also has to budget for repairs, maintenance and utilities.
The spouse that is being bought out or who is giving up their interest in the property may want their name off the title. That would mean the spouse who is staying would have to refinance. Could they qualify for the new loan if their income has to be $10,000/mo?
Also, especially in this economy, is there any equity in the home? Is there any benefit to paying a mortgage on a property that is worth less than is owed on it?
The other decision is what is the wisest use of one’s financial resources? Spending a disproportionate amount of income to live in an expensive home? Or downsizing, perhaps moving into a rental, and using the money saved for other expenses like childcare or education. The spouse that is staying may even need to increase the mortgage in order to buy out the other spouse. Can the spouse staying qualify for this increased amount? Will the property appraise at this higher number?
If it is decided that the best move is to sell, then the question becomes, how much will it cost to sell? There are fees like transfer tax and commissions involved. There may be capital gains. On a principal residence, the first $250,000 for a single person and $500,000 for a married couple is tax free if the property was owner occupied for 2 of the last 5 years. The rest is taxable. For investment property, there may be capital gains tax to pay. If one wants to avoid paying this tax, they could consider doing a 1031 exchange and buying a replacement property. I’ve handled several of these transactions and they have strict rules that have to be followed in order to be done properly.
Especially here in SF, we have situations where a divorcing couple owns part of a multi unit building that they own as a Tenants in Common (TIC) with other owners. We recently listed a property in this situation and I can tell you they are very complicated. You have to hire a realtor who has had specific experience in these transactions.
Ok, let’s say after all is said and done, the decision is made to sell the house and split the proceeds. What is the next step?
Choose a Realtor.
what are some tips in selecting a Realtor?
A: When selecting a realtor, look for at least several years of experience in your local market, preferably in your neighborhood and preferably with divorce-related experience.
Ask several real estate agents for listing presentations that include an estimate of value. Agents don’t charge for this service since they hope to list your house. You may wish to get a formal appraisal as well, or maybe two.
Also, it is helpful to find an agent with experience juggling the emotional and financial needs of divorcing couples
Each realtor explains why he or she is best for the job, giving you the ability to observe the person in action.
Divorce Tip: If possible, have your spouse attend the listing presentation. Spouses excluded from the process may view a realtor or other professional as taking sides, thus destroying the very trust that encourages cooperation.
Once a market value is obtained, how is the couple to figure out their proceeds from sale?
Get a payoff demand from the lender. Don’t forget second mortgages, lines of credit and other encumbrances. Add to that the cost of the sale-commissions, transfer tax, compliance with local ordinances, preparing house for sale, portion of proceeds that will go to the other spouse. Capital gains taxes owed, if any. Subtract from the purchase price.
What are the qualities to consider in a realtor?
During the listing presentation, the realtor should be:
Enthusiastic–. Eager and able to generate excitement.
Professional-. Presentable and instills confidence.
. Realistic as to price and timing based on the evidence presented.
. Experienced in divorce situations and sensitive to your unique needs.
. Prepares a comparative market analysis (“CMA”) and suggests an asking price.
. Justifies the price with recent sales comparables (“comps”) in the area.
. Knows current market conditions, for example, what’s selling and what’s not, and the average time a house is on the market.
A Strategic Planner
. Presents a preliminary marketing plan and shares some ideas of how to best prepare the house for sale.
. Follows up with a more detailed plan, including the type and frequency of advertising and marketing.
. Agrees to immediately list the house with MLS and conduct open houses.
. An Expert at Preparing a House for Sale
. Makes good, common sense recommendations.
. Gives advice that’s neither too aggressive nor too passive.
. Explains the laws of agency; the legal duties of sellers’ and buyers’ agents.
. Doesn’t pressure you to sign a listing agreement on the spot.
. Creates a comfort level for you and your spouse.
Ethics and Professionalism
. Is the broker or salesperson a member of your local board of realtors?
Local Market Experience
. Number of years in the market? (ideally at least 3 years full time)
. Is he or she a full-time professional? (an absolute requirement)
. Number of listings and sales in the last year?
. Does he or she live or work in your neighborhood? (helpful, not required)
. Did he or she recently list or sell any homes in the immediate neighborhood? (ideally at least one)
. Ask for a couple of references (maybe someone who sold incident to divorce) and ask that former client whether they would hire the agent again.
. Make independent inquiry, perhaps “Google” the agent or visit an “open house” sponsored by the agent.
. Ask about the agent’s experience with divorcing couples and how he or she was uniquely helpful.
. What is the rate?
. Does the agent work with buyers’ brokers and what percent of the commission will he or she share to encourage buzz within the brokerage community?
Home sales are always stressful, but a divorcing couple’s inability to fully cooperate often brings stress levels to new heights. Couples who are best able to cooperate share the largest amount of money.
What is a Realtor/Facilitator?
This term is used to better explain the role of an experienced realtor in the divorce process. Realtors do more than just sell houses; they facilitate cooperation between divorcing couples and their respective attorneys. Cooperation will reduce stress levels and promote more advantageous terms.
A decision has been made on a Realtor. Now what?
It’s time to sign a listing agreement. Be very sure about your decision to sell because a real estate listing agreement is a legally binding contract between you and the listing broker. Your agent receives a commission upon sale whether or not he or his firm actually makes the sale. In fact, even if you sell the house yourself, you still must pay the commission. This type of popular listing protects the listing broker’s commission, thus encouraging her to invest a significant amount of time and money, and also to cooperate with MLS (“Multiple Listing Service”).
What services does a realtor provide?
Realtors perform the following important functions:
Setting the Price – A Realtor will propose an asking price and marketing plan based on his or her neutral, independent expert assessment without prejudice against you or your spouse. Both sides can trust the realtor as his or her loyalties are non-partisan. Trust means cooperation. Cooperation means more money faster.
Preparing the House for Sale – Realtors are experts in suggesting cost-effective strategies to best show the house. For example, curb appeal (first appearances from the street) is enhanced by low-cost debris removal, gardening, and maybe even some paint. Interior spaces are more attractive when clean and shiny, and they appear more spacious if uncluttered. Disagreements are bound to sabotage house preparation unless divorcing couples follow expert advice.
Ask Yourself: How much should be spent on what? Whose junk gets tossed? Who is responsible for doing what? Who pays for what? Will these disagreements cost you unnecessary legal fees?
Divorce Tip: While a realtor can’t solve all these problems, a couple’s conflict can be diminished by the strength of a trusted expert.
Advertising and Promoting the House – Realtors are savvy advertisers. Most listing agreements call for the realtor to pay for advertising, so they are experts in optimizing their return on investment. Also, they will post your home on the local MLS (multiple listing service).
Showing the House – Realtors are experts at meeting prospective buyers and showing homes to pre-qualified prospects who meet certain mortgage qualification standards. Realtors know what to say and what not to say; their commission depends on it.
Executing a Purchase Agreement – Realtors understand the complicated legalese and can anticipate lawyers’ objections and concerns. They will execute a document that will be satisfactory to your spouse and his or her counsel saving unnecessary legal fees.
Closing the Deal – A signed agreement is the beginning of another long process. The realtor often spearheads pre-closing tasks like working with the sellers to obtain documents and satisfying closing contingencies like termite inspection and remediation. Also, sellers are often required to obtain various approvals, such as building code certifications from the local authorities. Finally, realtors are expeditors; they keep lawyers on track, making sure all contingencies are addressed in a timely manner.
Home sales are often like contested divorces; professional help is essential.
Any tips here?
Work with, not against, your spouse in selecting an agent and selling the house. We suggest that you work constructively with your spouse to make the most advantageous decision. Consider a Realtor a professional who is neutral enough to be able to get the divorcing couple past come humps in the part of the divorce involving the sale that they otherwise would have to resolve by spending $$ on attorneys. They can also help maximize the value of the asset so that both spouses can move forward in the next phase of their lives with as much economic resources as possible. With the financial drain that a divorce can bring, they will need it!