In a divorce, the first step in dealing with real estate issues is to determine the value of the property. A real estate valuation may be performed by a Realtor at very little cost. Equity is the true value of the asset to the parties. It is determined by subtracting any loans secured against the property from the properties’ market value. In many divorce cases today, properties have negative equity (i.e., loans exceed the value). In addition, people may be experiencing difficulty making their payments and properties are “in distress” (i.e., in risk of foreclosure).
In a financial settlement in divorce proceedings, if the real estate is awarded to one party, the other party must be compensated for their share of the marital equity. Conversely, as in many cases today, one or both parties are left to manage the negative equity, or debt, associated with real estate.
When a property has equity and payments are current, options to consider are:
- List for Sale and Divide Net Proceeds after tax and other costs*
- Refinance Mortgage and seek additional funds to pay off the other parties’ equitable interest.
- One party retains and chooses to live in if they can afford the house once divorce is final*.
- Sell at a future date – one party remains in the house or Lease Option to a qualified lessee.
- One party remains in the house and pays rent to the other party who retains ownership; this option can have tax advantages for one party and should be considered in overall settlement.
* Could also involve transfer of other assets as compensation for equity
When a property has negative equity and possibly in distress, a few options to consider:
- Enter into a Short Sale agreement w/ the lender (s). We are real estate professionals who are trained to help determine how one would qualify, what is needed to work with the bank, pricing strategies, and marketing expertise to sell below what one owes on the property. In this case, it is possible to avoid foreclosure if one is behind and cannot their payments. There are tax implications with this strategy as well which can be discussed.
- Modify the loan through the lender and utilize government programs if one qualifies and continue to make payments to avoid foreclosure.
- List for Lease to help pay the mortgage in the event one cannot afford to remain or sell via short sale process. This is a long term strategy and requires active participation or management assistance. Properties may recoup value over time. One party should be compensated for taking on the debt.
Once a value has been determined, tax implications have been considered, and an agreement has been reached as to who keeps and/or manages the marital property, buying or leasing a new home will be a consideration for one party in a divorce. A financial professional with real estate expertise can help come up with the best strategy given the settlement terms and its impact on one’s future cash flow.