Typically, the largest asset in a divorce case is the former marital home. Determining the net equity of this asset (fair market value less the mortgage balance) is critical to determine what to do with the house when a divorce is concluding. There are usually two options: Both husband and wife can sell the house, either voluntarily or through a post-divorce ‘partition action’, or one spouse can buy-out the other spouse by paying the other spouse one-half of the net equity. (This gives the ‘buying-out’ spouse sole title to the house.) However, in today’s difficult and unpredictable housing market either of these two options can be problematic. The cause of the rising prices of homes and mortgage rates is principally inflation, but supply-and-demand and other basic economic concepts are at work, too.
To begin, the parties have to look at today’s housing market from both ends: The sellers (the divorcing husband and wife) need to see what is the fair market value for the former marital home, and any potential buyers need to see if they can qualify for a mortgage to finance the sale of the couples’ house. I would highly recommend having an appraisal performed by a qualified residential real estate appraiser to determine the current fair market value of the former marital home, particularly if the parties owned the home for many years.
SELLING THE FORMER MARITAL HOME BY BOTH DIVORCING SPOUSES.
Should the divorcing spouses wish to sell the former marital home, the issue of financing by a potential buyer arises. At the beginning of 2022, the interest rate on a traditional thirty-year fixed rate mortgage was 3.11%. In October 2022, it is 7.06%, more than doubling in less than a year. Here is a concrete example: For a purchase money mortgage on a $600,000 house with a 10% down payment ($60,000), the monthly payment at 4% would be $2,500. At 7%, the monthly payment would be $3,600! Many potential buyers/borrowers thus would be “priced-out” of the market, and single family homes in South Florida now average $565,000, an increase of almost 10% in one year. Note that home prices have risen for over 126 months with no end in sight. So, finding a qualified buyer may be an issue when the divorcing spouses wish to sell their former marital home. Potential buyers are committed to chasing increasing home prices coupled with increasing mortgage interest rates.
Don’t forget: Once the former marital home is sold, assuming one spouse does not want to refinance the house to buy-out the other spouse and the divorcing couple just wants to sell the former marital home, the couple must now look for individual residences. This in a market that, as noted above, has rapidly risen in price while the ability to finance the purchase of two new homes is constricting each month.
ONE DIVORCING SPOUSE BUYING-OUT THE OTHER DIVORCING SPOUSE.
The option for one spouse to buy-out the other spouse by financing the purchase of one-half of the net equity raises the same mortgage financing issues raised above. The value of the former marital home may have risen dramatically during the course of the marriage (particularly in long-term marriages), and the ability to refinance the buy-out of the other divorcing spouse may be very limited. At the very least the monthly mortgage payment, which may have been set when the then-happy couple bought the house, will dramatically increase in today’s housing and interest rate environment. It may make more sense for divorcing couples to consider renting their new homes. Keep in mind that rental rates – like housing purchase prices – are also rising dramatically year-over-year.
The law office of David B. Mitchell works with clients to determine which of these paths is optimal. This may mean using the services of a qualified real estate appraiser as well as seeking guidance from real estate financing specialists, such as banks and other lenders. The goal is to have the client receive the best options from which a decision must be made.