If you’re like most people, your home represents the most valuable asset you’ve accumulated during your marriage.
Depending on location, market conditions, the length of time a home has been owned and other factors, that can mean making decisions about a home during a divorce could ultimately involve hundreds of thousands of dollars, or even more.
That makes dividing home equity one of the most important and financially impactful aspects of a divorce, one that requires careful thought and deliberation.
I chatted with Ross Garcia to explore the various options that are available when dividing home ownership in a divorce.
Ross Garcia, CDLP, is the founder of Divorce Mortgage Advisors and an expert on real estate financing solutions for couples facing divorce. Ross takes great pride in developing creative strategies for clients to retain their mortgage, and advising on the role it plays in shaping their overall settlement strategy.
Let’s jump in…
What is the main reason why it’s so important to put an accurate value on a family home in a divorce?
For many people, a family home is probably the largest financial asset that you have and so the value of this asset is going to have a far-reaching impact on a divorcing couple’s post-divorce finances.
What are the options for determining the value of the house in a divorce?
There are several different ways you can go about valuing the house.
The most common ways are to get a formal appraisal, broker price opinion, comparative market analysis, property tax assessment, or use an online price estimator such as Zillow or Redfin. Some methods are better than others.
The one that we always advise is to get a full appraisal done by an experienced and qualified appraiser. This is the most comprehensive and usually the most accurate of all the valuation methods.
A broker price opinion is often referred to as a BPO, and a report that is executed by a licensed real estate agent, broker or appraiser.
A comparative market analysis, or CMA, is also done by a real estate broker. A CMA is similar to a BPO in that it provides an estimated value of the property. However, a CMA is much more focused on comparable properties and estimating a value based on properties that have sold recently.
A property tax assessment is what the county uses to value your property and determine what your property taxes are going to be. But the problem with using this method is that assessment values are not updated on a daily or monthly basis. That means it’s not going to be a good indicator of what today’s value is.
Some of our clients will ask us about using online price estimators like Zillow. We generally recommend against this because they are not a good indicator of the true value. They don’t take into consideration the many details of the property. They are simply not a reliable and accurate source for valuation information.
What’s the difference between a broker price opinion and a comparative market analysis, and which one is better?
Both provide an estimated value of the property. I think a CMA is better in most instances because it is much more focused on comparable properties and estimating a value based on properties that have sold recently.
What about the possibility of using an appraisal that’s done for a mortgage as the appraised value?
An appraisal done for a mortgage to determine value would be a great option. It’s the most comprehensive report that one can probably get.
But every lender is going to require their own appraisal. So be prepared that if you’re getting an appraisal done to determine what your equity is as part of a divorce. If you end up keeping the home and then you’re going to refinance it, a new appraisal would need to be done. So, the appraisal you have to determine equity may or may not be relevant to you going forward.
There is also a commonly held belief that you may not want to use an appraisal that is done for mortgage purposes because it might be a lower value since the bank or the lender is the one commissioning that appraisal. Is there any truth to that or is that not the case?
I’ve heard that in the past. But I have not seen that to be the case. I’ve seen real estate financing appraisals be both higher and lower than what you’d wind up with as a divorce appraisal. But personally, I have no basis for consistently lower appraisals from banks on lenders in my experience.
You mentioned an appraisal is the most formal way and the best way to come to a determination of value. Are there any cons or downsides to that? Are there any reasons everyone shouldn’t be doing it? What are some of the reasons someone might want to go with another approach there?
It depends. I think part of it has to do with who you’re asking. One spouse may want a higher value if they are the one leaving the house as an asset and getting bought out. If a spouse is going to retain the property and is buying out their spouse, they’d theoretically be more inclined to accept the lower value.
Are there other reasons why everyone doesn’t get an appraisal?
A full appraisal can be the most expensive option. It could run anywhere from $500 to $1000 for a super high-end property.
Another reason you might not want a full appraisal is because an appraiser is actually going to come to the house and do a full inspection with a walkthrough. If there are parts of the house that you think would not help you in terms of value and you don’t want someone to walk through your property you should look at other options.
For example, a comparative market analysis or broker price opinion typically doesn’t include a walkthrough by a licensed appraiser.
Once you an agreed-upon valuation then how do you determine the equity? How is home equity calculated?
Your home equity is going to be the value of your house minus any liens on the property. Liens could be something like a first mortgage balance or an equity line of credit.
And there could be other liens. For example, a lot of people these days have solar leases or solar loans for solar panels. That’s a lien on the property if there’s outstanding debt related to that. If there are tax liens and other things tied to the property, those would then be a direct debit to your equity.
After you figure out what the value is and subtract any liens, whatever’s leftover would be the equity.
And if either party had a separate property interest, then there would be a reduction from the community property equity.
Yes, in states where this is applicable, a reduction of the equity would take place and then the equity would be split according to asset division laws of a particular state where the divorce takes place.
Property owners know that there’s a mortgage on the property or maybe even a home equity line of credit. But how would someone go about figuring out if there were some of the other liens on a property?
There are two ways most clients would go about getting that information. The one we advise in most instances is to get a formal title report from a title company. The title report would have a full chain of title and it would be accurate and up to date.
How would someone go about getting that? Would they go down to the County Recorder’s Office or…what are the steps that someone would take to obtain that?
They can either reach out to a mortgage broker that has an existing relationship with the title company and have that person obtain a copy of the report for them or they would just reach out to a title company and pay to receive a copy of their preliminary title report.
Is there another option for finding out about any liens?
Another option would be a property profile report.
What’s the cost for that if they don’t have a relationship with a divorce mortgage advisor?
My guess is that you can obtain a copy for anywhere between $75-$250 depending on the provider.
When my clients come to me and ask me for a copy of a report, I reach out to my title company and I’m able to get it free of charge.
But if the ultimate goal is to apply for some sort of financing on the property then you’re probably better off reaching out to whoever you’re planning to use for mortgage services and letting them do it so it’s all kind of done under one umbrella, assuming that, that’s the same escrow or title company that you would be using for the transaction itself when the time comes.
Would a realtor also have access to that information?
Realtors should have access as well to title companies and access to those reports.
And then you mentioned property profile as another avenue. Tell me about that.
A property profile is just kind of a summary. It’s essentially a cliff notes version of a title report. Theoretically, it should match the title report, but as with anything else that’s curated from another document, it may or may not have inaccuracies.
If you’re trying to be 100 percent certain that you’re getting the correct information, you’re going to want a title report because that property profile potentially leaves the door open for errors.
After determining the valuation of the property, then checking to see if there are any liens or separate property claims, you arrive at a dollar figure of what the property’s equity is worth. What is the significance of the equity share?
Your equity share is essentially an account balance, albeit an illiquid one. So, if there’s a million dollars in equity on a property and you’re in a community property state, theoretically each of you has $500,000 dollars in equity. That can be converted to cash assuming you don’t retain the property yourself. Every dollar counts because every dollar is going to fund your post-settlement financial future.
What are the ways to go about splitting the equity in divorce?
The number one way clients in divorce typically divide equity is by selling the house and splitting the proceeds, which would be 50/50 if you’re in a community property state. You will need to factor in some costs, such as a real estate commission, capital gains taxes, and things like that if you’re really trying to get an idea of what your net share is going to be after the sale.
If you’re going to sell the house, then you don’t have to agree on the value because ultimately the house is going to be worth whatever it sells for. So, there really would be no reason to do an appraisal. Is that correct?
Yes. Unless the value was going to be a factor in your decision making as to whether to sell or to hold onto it. But if you’re going to sell ultimately your share of the equity is going to be a factor of what that sales price is and nothing else.
What other options are there besides selling the house?
The other option is for one spouse to retain the house and the other spouse to be bought out.
Buying out means the spouse that’s retaining the property needs to find a way to get the out spouse their fair share of the equity.
Again, using one million dollars as an example, each spouse is entitled to $500,000. The person retaining the house would need to find a way to pay the other spouse their $500,000 share of the equity. They can do that in two different ways. One is if there are other liquid funds, if there are other assets that are community property assets, you can forfeit those assets which would otherwise be half yours and forfeit them to the out spouse to credit towards that $500,000 buyout amount. This might be through a retirement account, jewelry, cars, valuables or other assets.
You are essentially trading your share of other assets for your spouse’s interest in the house?
Yes. That all would be done as part of your settlement in calculating who’s owed what and what are the means to get there whether by offsetting other assets. The other way to accomplish this is to refinance the property and pull cash out to directly buy out your spouse using the equity in the house.
Walk us through an example of how that would work. Again, using a million dollars of equity as an example, and the parties agreed that the buyout amount is $500,000. How would a cash-out refinance help or work in that situation?
If you’re the one keeping the house, you owe your spouse $500,000. But there are no other assets to offset that amount. So, the only way for you to tap into that $500,000 is to pull equity cash proceeds from the property. That would entail doing refinance.
It’s no different than when you first bought the property if you put a loan in place. You went through that mortgage process. A refinance is another mortgage process, which would enable you to pull $500,000 out. After you give it to your ex-spouse, he or she is no longer the owner of the property. They have their share of the equity. And now at the end of the day, you have a $500,000 mortgage that you’re making payments on, on a house that you own that’s now worth a million and you’re left with your $500,000 in equity after pulling out $500,000 for the out spouse.
The other spouse has $500,000 in cash, and you have $500,000 in home equity, making it a fair trade.
Is there anything that a divorced spouse or divorced individual should be aware of related to cash-out refinance specifically related to divorce?
There are two timing considerations.
One is you could do it prior to finalizing the divorce. In other words, you’ve agreed on the house. You’ve agreed on how to split the equity. And you want to pull the cash out now, that’s fine.
In a pre-settlement circumstance, you could pull the cash out, but there will be a slight increase in your mortgage interest rate as a result of pulling cash out of the property.
The way to eliminate that increase in the interest rate when you’re pulling cash out is by doing the refinance once the divorce is final. Because once the divorce is final you can pull equity from the house. You can pull cash from the house.
And as long as that cash goes directly to your ex-spouse through escrow under that refinance, under the umbrella of that refinance transaction and it’s dictated in you settlement agreement that you owe your spouse $500,000, the lender’s not going to ding you for taking cash out because theoretically, you’re not taking cash out. You’re buying the property from your spouse.
Okay, we’ve covered sell and split. We’ve covered a buyout. Are there any other options for someone to consider?
Yes. Often times there are reasons why clients cannot sell a property. Maybe they have no way of refinancing the property, or they also can’t sell it because their kids are at a certain time in their lives where they need to stay in that home. Whatever the circumstances are, there’s always the option to retain joint ownership following the divorce.
You can always set a date to sell it in the future. You’re essentially putting off the issue of how to split the equity proceeds until the time comes to do something with the property, whether it’s to sell it or buy the other spouse out.
To summarize, essentially there’s really three main options for what to do with the house in a divorce. Option one is to sell the house and split the proceeds. Option two is a buyout, which could be done with either spouse buying the other spouse. And then in doing so, they might do it with offsetting or trading other assets or they could actually leverage or tap into their home equity, pull cash out and use that fund to buy out of the out spouse. And then third would be some sort of deferred sale where you maintain joint ownership until an agreed-upon future date.
Yes. Whatever route you decide to go, don’t underestimate the importance of getting that value done right and getting it done early on in the process because this is your money that we’re talking about and you will need every possible dollar that you can to help you start rebuilding your life after your divorce.
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