For couples who have a marital home that they’re trying to figure out how to deal with as part of their divorce process, we’ve talked about the option of selling immediately to a third party and the option of doing a buyout. In this episode, I wanted to talk about the option of co-owning the home for a set period of time, and then having the option to sell after a set period of time, or the agreement to sell after a set period of time.
Why would people agree to continue co-owning a home after their divorce? Well, for a couple of reasons. There may be, both spouses may be invested in having one of them stay in the home for some period of time, but they are not able to do a buyout, either because they can’t agree on the value of the asset, or they can’t agree on any other component of the equity calculation for a buyout. So, maybe one of those spouses feels really strongly that they are only willing to pay the other the amount that the other would receive on the third party sale, and the other feels that that’s not fair because if they’re doing a buyout, the third party sale is not actually happening.
For whatever reason, there may have been challenge in agreeing to the buyout amount, or maybe it would be impossible for the spouse who would stay in the home in a buyout to take over the debt in their own name. So, they weren’t able to work out the challenge around the debt. Many reasons. But the couple may nonetheless feel that it’s really important for them, and this often ties into having consistency for children, that it’s really important for them to remain in the home for at least another two years, for instance, until their youngest child finishes elementary school.
When you agree to co-own for a period of time and then to sell or to give either party the right to trigger a sale, in some ways, you get the best of both worlds. So, you are not forcing both spouses and the kids to both go through the divorce process and the upheaval of separating the family’s households from one to two, but also go through a move. So you’re staggering the challenges of the divorce process and then the move.
But also, you don’t have the challenges that a buyout brings with it, which are: How do we determine the value if it’s not actually being sold? How do we figure out what the equity is? How do we come up with the cash for a buyout? How do we deal with the transfer of the debt to one person’s name? All of those issues are resolved in a third party sale, and if you delay a third party sale, you are also solving for the issue of the immediate challenge of selling your home in the midst of a divorce process.
The biggest challenge I see, though, in the agreement to co-own the home and the agreement to sell or the discretion to sell at some agreed upon point in the future is that typically one of the spouses remains in the home. And that spouse is typically, not always but often, paying most or all of the carrying costs of the home. There are a couple of challenges there.
First of all, if one spouse is remaining in the home, the other spouse has to have a place to live and they typically have to pay for that place to live. Not only is there the psychological benefit of being able to remain in the home and not having to move, that the other spouse doesn’t enjoy, but the other spouse is having to incur $X a month for their own living situation, which the spouse remaining in the home is…they’re not having to incur rent, let’s say, and the other spouse often is. So there’s some inequity there, and how do you address that?
Also, the spouse who is remaining in the home may be paying most or all of the mortgage payments of the property taxes. And along with those things come two benefits. One is tax-related, so there’s the current tax benefit of being able to deduct mortgage interest payments made and being able to deduct property tax payments made. Then there’s also the benefit to both spouses, when you’re making mortgage payments toward the principal of the mortgage, of the reduction of the mortgage principal, which ultimately means when you sell, you will realize a greater portion of the sale proceeds because you’ll have less debt.
So you have to negotiate when you are anticipating a period of co-ownership during which one person is living in the home. You need to negotiate how those things are going to be shared. Who is going to pay what expenses related to the home? Number one. And then based on that, who will be entitled to realize what benefits associated with those expenses? So, who is getting the tax benefits associated with paying the mortgage interests in the property taxes? Who is getting the ultimate benefit upon sale of the mortgage principal payments, of the reduction in the mortgage balance?
Finally, there’s the challenge of, for the person who is not living in the home and not getting that benefit, and if you’re not doing a sale at the present time, that person is both out of the home but then they’re also not getting their equity out of the home immediately. They’re having to wait to get their money, maybe for a year or two years or five years, whatever you agree upon. And so, are you compensating them for that in any way?
For some people, because they anticipate that the real estate market will grow in their area, they assess that the spouse who is not living in the home is still staying invested in a good investment, in a real estate investment in this area that’s appreciating, and thus, their money, even though they don’t have access to it now, they’ll have access to it in two years and it will have grown.
Whereas, if you are not so certain the value of your real estate asset is going to appreciate, then for the spouse who is out of the home, let’s say their money stays completely stagnant and it doesn’t grow over the course of five years, well, that’s definitely a detriment to them. If they had received the money from a third party sale upfront and had the opportunity to invest that money in the stock market or invest it in some other endeavor or invest it in the purchase of another home, then they would have been incurring benefits during this entire time leading up to a sale rather than just having their money sit there stagnant, not having access to it but not really getting to enjoy any benefits from investing it either.
So, that’s another point of negotiation for the spouses to figure out, is how are we going to compensate the person who is not staying in the home for that, for foregoing the upfront receipt of their share of the equity, and if so, how are we going to do that?
The decision to co-own for a period of time is not one that is advisable if you and your spouse are absolutely unable to work together in any fashion and if you don’t trust each other around, let’s say with financial matters. There’s certainly more overlap, continued overlap, continued connection that comes with continuing to co-own any kind of asset but certainly a home, and so the complications of the decision to co-own for a period and then sell are more in figuring out the different financial sort of costs and benefits that I just took you through, but also just in having to interface with each other and continue to cooperate around the management of what is often a very valuable, if not your most valuable, asset.
At the same time, the obvious benefits are that you don’t have to figure out a lot of the complexity and challenges that you do with a buyout. You don’t have to figure out the value of the asset. The market will do that for you. You don’t have to make a decision about how to come up with the equity because you will incur the costs of sale, so there’s not really an argument around those. One spouse doesn’t have to qualify for the debt. And at the same time, you don’t have the same disruption that you have when you’re putting your home on the market right away in the midst of the divorce process. And that’s the right thing to do for many families. It’s not an inherently bad thing at all.
But for people who would like to have a little bit more of consistency of living situation but can’t make the buyout come together, the decision to co-own for some period of time and then sell can be just the right middle ground for them.