Wednesday, July 24, 2019

Valuation of the Marital Home

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 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.