This article is part of a 5-part series on what divorcing couples might do when faced with the pressing question of what to do with the family home. It is a decision many families are grappling with throughout the country.
The numbers help to tell the story: 65 percent of Americans own homes; Americans owe over $10 trillion on their mortgages; home ownership is the average American’s greatest investment; 39 percent of marriages end in breakup with the pandemic causing a spike in divorce. Add on to these numbers the fact that, at present time, the Federal Reserve has been aggressively hiking interest rates. It is therefore no wonder most divorcing couples are confronted with the dilemma of what to do with the family home and oftentimes struggle to find an answer.
This first option stands out as the cleanest conclusion –sell the home, liquidate your joint investment into cash, and split the proceeds.
What are the benefits of selling the family home?
There are two primary benefits to selling the family home when entering into divorce – one is practical; the other is emotional.
First, as to the practical benefits, a home sale can be the most sensible option when neither spouse can independently qualify for a refinance and/or afford the home. At present, interest rates are rapidly rising and it is increasingly difficult for individuals to refinance from a low-interest rate joint mortgage to a relatively high-interest rate solo mortgage. And even if one spouse can qualify for a new mortgage, each spouse must decide whether they can afford the costs of home ownership on one salary – the utilities, the taxes, insurance and home maintenance.
Second, as for the emotional benefits, selling the family home allows for a “clean break.” With most divorces, deciding what to do with the family home is often weighted with emotional ties and considerations. It is not a purely practical consideration. For some, leaving behind the family home may be tumultuous change that creates further chaos during an uncertain time. Yet for others, leaving behind a home where you experienced divorce provides necessary closure so you can set a new course.
What should you do in preparation to sell the family home?
Your best first step when deciding whether and how to sell the family home is to speak with a trusted real estate agent. A good agent can advise you on when to list your house, at what price, and whether there are necessary improvements that need to be completed before listing.
It takes time to sell a home – it’s estimated that people spend several months planning and preparing to sell their home. It then takes, on average, 2-3 months with the house listed on the market, pending sale and closing.
When should you sell the home?
There are many practical benefits to selling the home before you get divorced. Without question, a court granting your dissolution may prefer that the house be sold or pending sale. A completed sale offers the benefit of certainty.
In the event you are waiting to sell the family home after divorce, you’ll need to detail the various contingencies of a deferred sale. There are many “what to do in the event of…” scenarios. As a divorcing couple—often times working at arm’s length—you’ll need to make joint decisions about, among other matters: which real estate agent will you hire? What will be your listing price? What improvements (if any) to make, and how will you pay for those improvements? What is the lowest price you’d accept; and if offers fall below this mark, what to do then?
Finally, there is the issue of carrying costs. Until the official closing and sale of the home, you’ll need agreement on how you’ll pay for the mortgage, utilities, insurance and taxes.
What are the costs to selling a home?
For divorcing couples who elect to sell their home, it’s best to have a realistic picture of the transactional costs of selling a home. For many couples contemplating a home sale, they compute their equity stake by subtracting their mortgage balance from the estimated home value. But the actual amount of your net proceeds may surprise you. As a basic rule of thumb, it’s estimated that you’ll spend 10 percent of the purchase price in order to complete the sale of your home.
There are, for example, closing costs that most sellers must incur. As seller, you will typically pay 6 percent in commissions which will be split between your agent and the buyer’s agent. This is often the largest transactional cost. Some homeowners might seek to avoid payment of a commission by selling the home themselves – often referred to as a FSBO (“for sale by owner”). This option, however, has risks. There is evidence a FSBO home may sell for less – often less than the 6 percent you’d be saving. Other closing costs might include transfer taxes, escrow fees, and attorney fees.
There are also seller’s concessions. These costs include post inspection repairs, a warranty for the buyer and credits toward closing costs. And there will likely be marketing costs, including for some: professional cleaning, landscaping, staging, professional photos, home improvement, and pre-inspection.
You should also anticipate the cost of moving, including payment to movers, temporary housing, ongoing utilities, etc. If you move out of your home before it sells, you may need to secure a rider to your home insurance policy to cover a vacant property.
What if you are underwater on your mortgage?
If your current mortgage balance exceeds the property value, then you may be looking at a “short sale” in which you’ll need to come up with additional funds to pay off your loan. If you fall into this category, there are at least two options to consider:
First, you can talk to your bank to see whether you can negotiate a walk-away on sale. A short-sale negotiation will require time and patience, but it is often worth a try. If you have a successful negotiation, be sure to reduce your agreement to writing.
Second, you can explore the option of renting your house. In this instance, you can (hopefully) secure rental payments sufficient to cover your costs while you reduce your mortgage balance and/or wait for the market to improve. This option requires outlining contingencies and a joint venture agreement.
If you have questions about whether what to do with your family home during divorce, contact Jim Robenalt, an experienced mediator and lawyer, to discuss your particular circumstances. To schedule a free consultation call, you can get in touch with Jim by calling (216) 206-9789.