|The Unlucky Housekeeper
By Matt Mikula, CFP®, CDFA™
Zsa Zsa Gabor famously quipped about her personal life, "I'm a marvelous housekeeper. Every time I leave a man I keep his house." Having been married nine times with seven of her marriages ending in divorce and one annulled, Ms. Gabor may know a thing or two about the divorce process.
But times have certainly changed and the real estate market has shifted one's thinking during a divorce from "I want the house" to "you keep the house." Falling real estate prices and a soft market are playing a big role in the way couples split their assets. Gone are the days when couples battled over who gets to keep the marital home, often the largest asset they would own and one that was constantly appreciating in value. As real estate prices were skyrocketing, it was easy to ignore an asset that was illiquid, expensive to maintain, and provided no income to the spouse who was "lucky" enough to be awarded it.
Now couples and their attorneys must work together and find creative solutions to resolve the many issues surrounding the marital home. Some of these issues have always been around, yet in an environment where home prices only went up, it was easier to look the other way and say that everything was going to work out. This of course is not good planning.
One of the more important and complex financial decisions in a divorce is deciding whether to keep or sell the house. A family's emotional attachment to a home can often lead to a poor or irrational decision. One's true financial "value" of a home may be better defined by looking at their liquidity needs, cash flow and fixed expenses, than by only looking at the fair market value that an appraiser may provide. For someone in their late 50's approaching retirement with limited income, what would be more valuable to them - $500,000 of equity in a home with annual expenses of $30,000; or a $500,000 bond portfolio generating income? Couples facing divorce are realizing that owning a home can be a significant financial burden and can jeopardize other financial goals - like funding their children's college education or their own retirement plan.
Many divorcing couples are faced with the realization that neither can afford to keep the home and selling the home is the only option. With many mortgages underwater (they owe more than the home is worth), some must look to creative solutions to split an asset with negative equity. Probably the most common is for one of the ex-spouses to live in the home until the market recovers, or the children reach a certain age. As part of the divorce decree, the couple agrees to sell the home post-divorce and the net equity (or debt if still underwater) is split at that time. The couple will need to negotiate who pays for what expenses while one of the parties is living in the home (mortgage, taxes, upkeep, etc.). In addition there are rules around taxes and deductions that both parties must be aware of, especially if maintenance is involved, that can get complicated and must be worked out prior to setting up this arrangement.
Other solutions may include:
- Rent out the home to provide income to cover the mortgage payments until the house can sell for more than the mortgage balance
- Ex-spouses retain joint ownership and both continue to live in the home (in separate areas) until the market improves - probably not the most ideal solution
- "Bird-nesting"- the ex-spouses retain joint ownership of the home and rent out a separate apartment while the children remain in the home; each spouse alternates living in the house with the kids and then in the apartment on their own
- One of the ex-spouses lives in the home and pays rent to the other ex-spouse until the market gets better
- One of the ex-spouses provides temporary maintenance to the other who continues to live in the home until it can be sold
Divorcing couples are realizing how important it is to get their "financial house" in order if they are going to be well-prepared for life following a divorce; and perhaps in today's environment good housekeeping could actually mean not keeping the house. Sometimes the best solution may be for divorcing couples to just move on with their lives and sell the house at a loss, splitting the amount owed. Perhaps it is the former spouse who is able to walk away from the home who "wins" in the end.
Matt Mikula is a CFP® and CDFA™ with Balasa Dinverno Foltz LLC Private Wealth Management, a team of professionals which helps those facing a divorce plan and transition into this new phase of their life with confidence and peace of mind. BDF works together with you to determine what impact the settlement may have on your lifestyle and write out the steps that are necessary to reach your goals.