Split decisions

Real estate transactions can be complicated even under ideal circumstances. Throw a divorce into the mix, and things can get downright messy. Knowing more about what a divorcing couple is going through can help you better understand your clients and help them make informed choices about buying, selling, and renting when their marriage ends.

by Tracy B. Stewart   You get a call from an acquaintance who wants to list his million-dollar home with you. He wants to sell it quickly–for the highest price he can get, of course–but he’s really more interested in closing a deal soon than holding out for every last dollar. This is the best call you’ve received in months. Heck, it’s the best call of your career. And then he hits you with it: He’s getting a divorce.

Just because a homeowner is going though a divorce doesn’t mean you give up hope on a scenario like this. But you may want some additional information, like whether his wife has other ideas for their home and if it is separate or community property. There’s a pretty good chance that he cannot sell the house without her consent. If you don’t know the true situation, you could get yourself involved with a deal where months from now you are called in for a deposition.

Who owns the house? It depends

If a divorcing couple bought their house after they were married, it is a fairly straightforward ownership situation. It is community property (absent any special arrangements to the contrary). If not, there are several issues to factor in.

Consider a couple with a home the wife bought before the marriage. If the wife continued to make mortgage payments with her separate property money, the home might still be her sole separate property. If she added the husband’s name to the deed, it is likely that she made a "presumptive gift" of the house, and it is now community property. If the mortgage was paid with joint property (such as both salaries), the home is, or at least the proceeds of the sale are, partially community property and partially separate property.

Technically, a court might hold that the property is the wife’s separate property but the husband may be entitled to a reimbursement of amounts paid toward the mortgage and maintenance of the home. In this case, it is critical for the parties and probably the broker to have a discussion with the parties’ attorneys. A financial expert, such as a CPA, certified divorce planner, or a certified financial planner may also be valuable in helping them sort out their financial situation.

(See "Tricky listings" for more about the legal ramifications of accepting a listing for a house where the owners are going through a divorce.)

The options for the family home

There are many different scenarios for divorcing couples, and the choices they face will depend on their circumstances. Take the example of a wife who will receive the home as part of the divorce settlement or decree. She has a number of options:

Keep the house - She may want to preserve the home and continue her current lifestyle. She may see this as stability for her children.

Sell the house - She may want a smaller house, a bigger house, or just a different house. She may feel she deserves a more expensive home, regardless of whether her post-divorce cash flow can withstand the expenses.

Deed the house in exchange for cash - The husband may want to keep the house, refinance, and give the wife cash to buy her own house.

Continue to own the house jointly until the children grow up, then sell it and split the proceeds - While this does not lead to a sale anytime soon, this could get you a future sale.

If a buyer’s funds depend on a settlement, beware

Divorce settlements can be complex. When you qualify a buyer prospect, you may want to know more about the settlement if funds from it will be used to make a downpayment or an outright purchase. Some assumptions a buyer might make could be incorrect or may affect the timing of the transaction.

Take the following hypothetical couple as an example: Rose is a doctor and Joe is a firefighter. Joe is in a hurry to buy a house. He tells you he is getting $416,000 from his divorce and figures he will buy a house in the $250,000 range. You learn that his settlement includes $24,000 in a bank account, a $12,000 CD maturing in 10 months, $230,000 of Rose’s 401(k), his old pickup, and half of the $300,000 family house. On the day of his divorce, he owed his attorney $10,000 and he had $8,000 in credit-card debt.

While it seems there is plenty left with which to make a downpayment on the house and replace the truck, he may not be able to get his hands on cash as quickly as he thinks. His CPA may tell him not to cash out his CD before it matures, and to transfer the 401(k) money to an IRA. This leaves him with $150,000 tied up as half of the marital home.

The couple agreed that Rose is keeping the house, refinancing it, and giving Joe $150,000 from the new mortgage. Joe will have to wait for Rose to apply for the loan and get through the process before he can get the cash to buy his house. Depending on how amiable they are, she could move quickly or she might procrastinate.

Now let’s assume Joe and Rose were renters instead of homeowners. This time, Joe will get his downpayment from some of the 401(k) money. He will get the money via a Qualified Domestic Relations Order (QDRO) by taking advantage of a tax law that allows him to withdraw some of the retirement money without paying a 10% penalty. The potential problem here is that he has little control over the timing of the withdrawal. The time lag between the date of divorce and getting his money out of the QDRO could be several weeks or several months. The 401(k) plan administrator has to approve the QDRO before Joe gets any cash, and plan administrators can be picky. Joe needs to withdraw more than he needs, because the 401(k) plan will send 20% of the amount he withdraws to the IRS.

Facing an unknown financial future

You know that just because a buyer can qualify for a mortgage, it doesn’t mean he can truly afford the payments. When someone goes through a divorce, that person may not have a clear picture of his future income. Getting a better handle on this is particularly important when your client had a lower-paying job or no job during the marriage.

Is the potential buyer who is going through a divorce working with a financial expert? Many times divorcees–especially those who have not been working outside the home during their marriage–do not have a clear grasp of how much their lifestyle is about to change. In addition to them getting a financial professional to help sort out their financial position, you can help by discussing such matters as property taxes, homeowners insurance, and home maintenance.

Don’t assume that the spouse is getting alimony. In Texas, the judge can order alimony if the spouse has no assets, no skills, and has been married at least 10 years. Even then, the alimony is limited to three years and up to $2,500 per month. The couple can mutually agree to alimony, but then it may only be a substitute for other assets in the settlement.

Encourage potential buyers to check their credit report early. High credit-card debt and possible bankruptcy are common.

If a divorcing spouse cannot afford to buy now, talk with him or her about renting. The buyer may want to stay in his or her current neighborhood, so the children will not have to change schools. The divorcing spouse needs to work through the numbers to see if he or she can save while renting and work with you later on a purchase.

Call in the experts

You are accustomed to suggesting that clients get advice from other professionals such as inspectors. Divorcing clients may benefit greatly from an expert who can help them see how a divorce will impact finances. A certified divorce planner (CDP) can increase the chances of arriving at a settlement that fully addresses the couple’s long-term financial needs and forecasts the long-term effects of the settlement. If the CDP is not also a tax expert, a tax CPA can help your client avoid the costly, little-known tax traps related to divorce.

Tracy B. Stewart is a CPA, CFP, and CDP in College Station. Her mission is promoting financial security after divorce. She can be contacted at stewart@texasdivorcecpa.com or 979/680-1002.

Photo © PhotoDisc.

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