Why You Might Not Want to Keep the House in a Divorce
December 2, 2019 - An important aspect of any divorce is the division of assets, and the marital home is one of the most significant of these. Where a person lives not only provides them shelter but is usually a part of their identity as well. Someone going through a divorce may feel like they are losing much of what defines them—and they don’t want to lose one more thing. Similarly, a party may not want to uproot their children and move into an apartment, out of a certain school district or further away from friends, family, or their place of employment.
Thus, wanting to keep the house in a divorce can be a powerful emotional feeling, and also one grounded in practical concerns. However, if you think about it the way a financial professional does, it may not make sense to try to keep the house in the end.
The top three reasons you may not want to keep the house in a divorce are:
- Houses are illiquid and expensive assets,
- If you are dependent on your ex for support, and
- You may end up overpaying to buy your spouse out.
A house represents ongoing expenses
Houses are illiquid assets. $400,000 in home equity is often given equal weight on a marital balance sheet to, say, $400,000 in a brokerage account, but you cannot pay the bills with home equity the same way you can with a liquid investment account. Moreover, whereas a cash or investment account can be left alone to grow indefinitely, houses require the constant funneling of cash to cover mortgage payments, real estate taxes, and upkeep.
The biggest question you need to ask yourself is whether or not you can afford to pay all of the costs associated with homeownership on your own.
Also, if you are taking on the house you are assuming all the risks associated with that asset. If you keep the house in a divorce settlement and six months later the roof has a major issue, that could cost $10,000 or more. Do you have that amount of money in reserve? Or if the house is listed on the marital balance sheet at a fair market value of $600,000, but the economy falters value decreases to $530,000, you lose more yet on the decision to keep the house than you may have anticipated.
Who is responsible for paying for the house?
The biggest question you need to ask yourself is whether or not you can afford to pay all of the costs associated with homeownership on your own. Houses are expensive assets and not just because of mortgage payments. You also have to pay real estate taxes, property insurance, utilities (e.g. gas, electric, and trash collection), and any maintenance costs.
If you are dependent on spousal maintenance to meet your monthly financial obligations, you may want to reconsider taking the marital home.
Spousal maintenance can be a risky cash flow stream because your ex could lose their job and ask for a spousal maintenance modification. They may also send untimely payments or for less than the full amount, or they may unilaterally decide to stop making their payments altogether, requiring you to go back to court. You are limited in what you can do to pay for a home if you don’t have consistent cash flow.
Some people overpay for the house
Say that on a marital balance sheet the house is worth $600,000 and you have a loan against it for $200,000—the equity in the house is $400,000. If you want to keep the house, you have to buy your spouse out for their half. Yet, if you sell the house a few years later, you may not recoup the money you now have in it. Not only have you incurred all of the expenses involved with owning and maintaining the home, but you likely paid for all of the closing costs on the sale of the property, which typically runs about 7% of the sales price.
If you and your spouse were to agree to sell the house and split the net proceeds, any costs to get it ready to sell, closing costs, and realtor fees would be factored into the net equity value. But if the home is allocated solely to you on the marital balance sheet, oftentimes courts won’t let you build-in closing costs, meaning you would, essentially, overpay when buying out your spouse for the full $400,000 amount.
When it comes time to make the decision
Aside from the foregoing, additional factors to consider when deciding to keep the house include: Do you need such a large home now that your spouse has moved out and the kids are off attending college? What is the true fair market value of the house? Will the lender allow you to refinance the mortgage into your name only? Will you incur any capital gains on the future sale of the home?
Even taking all of the foregoing into consideration, you may still want to keep the home. That is fine if you have considered all of the ramifications—all of the recurring payments and unexpected costs of homeownership, and the uncertainty of relying on an ex-spouse for ongoing support. Just remember that it often makes more sense to sell the home, split the net proceeds, and start again somewhere new.