If you are getting divorced and you own your home, one issue
that will certainly need to be addressed is the valuation of your home. The exceptions to this are: 1) If you plan
to sell your home; and 2) if you plan to continue to jointly own the home. Let’s discuss these two options first.
If you plan to sell your home in the near future, you will
need to decide on a valuation in order to determine your asking price when the
home is put on the market.
Theoretically, the two of you should be able to agree on this as you
will want to maximize the profit (particularly if the plan is to share the net
proceeds equally.) The only time this sometimes becomes a problem is if one
person is in more of a hurry to sell the house and is willing to sell it at a
lower price just so that the house gets
sold faster. In the alternative, if one person is living in the house, you need
to make sure that the agreement makes provisions for what happens if the house
does not sell immediately. An important
note here is that you want to be careful of what you include in your divorce
agreement as the agreement is a public document. You do not want to publicize, for
example, what you and your spouse have agreed to as to sale price and potential
future reductions. If this is an issue,
you should consider putting that information in a side agreement that is not
part of your divorce agreement.
If you plan to continue to jointly own the house, you will
not necessarily need a current valuation. In most cases like this, the parties
agree that the division of proceeds will occur when the house is sold and will
be based on the actual sales price. There are however a whole set of other
issues when dividing sales proceeds in the future, such as: do you count
contribution one person has made towards paying down the mortgage? What about improvements
made? etc. If you plan to divide
proceeds of the house in the future based on a future sale, you must be careful
to plan for contingencies such as who pays for repairs, maintenance and
improvements.
If one of you plans to stay in the house and buy out the
other party’s equity, you have several options. First, let’s clarify what “
equity” means. As used here, it usually means the fair market value of the
house minus the outstanding mortgage(s). For example, if the house is worth
$300,000.00 and the mortgage is $150,000, the equity is $150,000.00.
Short of selling the house, the best way to get a “fair
market value” is to hire a certified real estate appraiser. Typically, this
will cost between $350-$500 depending on where you live. Certified real estate appraisers have no
interest in the property or the price arrived at, and must prepare the
evaluation according to accepted criteria.
Short of selling the property, hiring a certified real estate appraiser
is the closest you will be able to come to a fair market value. Even so, ultimately it is still someone’s
best guess at a value and it is not unusual to have two appraisers come up with
two different values.
A second option for determining fair market value is to
obtain a “market analysis.” These are
typically prepared by a real estate broker and although they may look like a
certified real estate appraisal, they are not.
Often brokers will offer a market analysis for free as a way of
establishing a relationship with potential sellers. While a paid certified real
estate appraiser has no interest in the valuation, one could argue that a real
estate broker has some interest in at least establishing a relationship with
the seller. A market analysis is certainly
useful information and may also be useful for purposes of comparing with
another valuation.
Another option is to use the tax valuation of your city or
town. Typically, however, this is not a particularly reliable method and is not
the recommended method.
I always suggest that clients look at online sites such as
Zillow.com just to see their valuation, for comparison purposes. I would not
necessarily rely on Zillow but again, it is more information that is free.
Finally, there is nothing that requires parties to obtain a
valuation. If the two of you agree on a valuation and both feel comfortable
with that number, you can agree on that number without an outside evaluation.
If you are refinancing, there will be a valuation done by
the bank for the refinance. You can rely
on that valuation, although some would argue that an appraisal for a bank loan
is not the same as a certified appraisal conducted solely for the purpose of
obtaining a valuation. And, the timing has to be right. You may want to know what
the “equity” in the house is before deciding to refinance. However, if you cannot
get the appraisal until after you apply for a refinance you have a
conundrum. Depending on the timing, a
bank may allow you to use its appraisal company to do the appraisal and the
bank will use that appraisal for the refinance if the appraisal was close in
time (say within 30 days) to the refinance.
A few other things about establishing a buy-out number for a
house are worth noting. When one person buys out the other party, will you
factor in the cost of a presumptive realtor’s commission? Sometimes this is
done and sometimes it is not. It depends
on the situation, the timing and the parties. It is something that you may want
to raise with your mediator to discuss.
If one person is refinancing, do the parties share the cost or is it
paid by the person keeping the house? There is no absolute right or wrong way
to do this and it is often dependent on the situation and the parties.
In conclusion, the valuation of the marital home and
splitting the equity in the home represents one of the most common issues that comes up in divorces. In
addition to the value associated with the home, the sale or division of the
marital home is also very emotional for a lot of people. It is thus very important for clients to
fully understand the options around valuation of the home before making a
decision.
