In the majority of divorces, the most valuable asset owned by a couple is their residence. This, in itself, is the reason it may be the biggest headache to resolve. However, there are other underlying factors that are present in virtually every case with a home that make disposition of the asset difficult.
Houses are notoriously difficult to value. Property appraisal is anything but an exact science, and material differences in appraised values are not unusual. In fact, the only sure way to determine the value of a house is to sell it. If the couple is unwilling to sell the house, then resolving the value of the house may be a major factor in the dissolution.
People, in general, form emotional attachments to their homes. This is because of what they are and what they represent. Houses can be refuges from the strifes and struggles of the world, the epitome of security, and emotional anchors. They can also be representations of self-worth, pride, and status. In addition to being a major investment in money, they can represent a significant investment in “sweat equity,” which is the time one or both of the parties spent to bring the home to its present condition. This emotional investment is similar to the enduring bonds that bind people to each other.
Houses create substantial economic burdens. Most homes are not treated as investments. If they were treated as investments, couples would do everything possible to increase the value of the property then sell it to make the most profit. Some couples proceed on this basis, but it is not generally how it works. Instead, the residence is treated more like the engagement ring of the couple. The ring does not earn money, it costs money. It costs money to insure, and the money invested in the ring is not earning interest, so there is a lost opportunity cost. Similarly, the amounts invested in houses do not earn interest. In addition to insurance, houses normally require interest expense, maintenance, utilities, taxes and a host of other expenditures necessary just to keep them standing. In addition, it is common for a residence to be purchased and maintained using the income of both parties. If one party attempts to keep the house, he or she is placed in the position of not only having to pay for and maintain the property, but is faced with the prospect of paying his or her spouse for one half of the equity in the property (equity is defined as the fair market value of the house less the amount of the mortgage).
There are at least four issues to contend with in the disposition of a residence:
(1) The equity in the house may be large. Large assets of any type usually represent significant problems in solving marital estate divisions.
(2) The value of the house may be difficult to determine. Uncertainty will normally cause conflict in a dissolution.
(3) The parties will probably have an emotional attachment to the home. Changing or attempting to break enduring bonds always causes stress. Stress can lead to conflict in dividing the marital estate.
(4) Residences are liabilities as well as being assets. They cost significant amounts to pay for and maintain. Neither party may have the economic ability to take possession of the residence.
Contending with this combination of financial and emotional issues is normally difficult. However, once the house is successfully dealt with, it may be that everything else in the marital estate is without significant consequence to either party and can be easily resolved.
There is a logical progression in the disposition of marital homes. There are only three questions that have to be answered:
(1) Does either party want the house?
(2) Can either party afford the house?
(3) Can the parties agree on a value?
Having the questions answered in terms of the logical sequence will lead to three possible solutions to the house:
(1) The house will be sold and the proceeds divided.
(2) An agreed upon value will be entered into the marital estate for division.
(3) The house issue cannot be resolved by the parties and must be referred to a trier of fact for a decision.
This logical disposition of the house moves from very basic questions which can resolve the situation quickly to more complicated questions which are more difficult to deal with.
For example, deciding that no one wants the house makes disposition of the house simple. Moving into areas where values for the house have to be determined is more complicated. Resorting to litigation is the highest level of complexity.
The process moves from the least expensive means of disposing of the house to the most expensive. For example, a market analysis is an opinion rendered by a realtor on the expected sales value of a home. Market analyses are often free or at a nominal charge. Appraisals are performed by trained and licensed professionals. Appraisers charge hundreds or thousands of dollars for their opinions.
Finally, the process moves from the least risky handling of the marital home to the most risky. Selling the home and dividing the proceeds is the resolution with the least risk. Allowing the matter to proceed to court is the resolution with the highest risk.
The logical progression of this process often suffer at the hands of the divorcing parties. The parties may start at the end of the process or in the middle and, just as likely, repeat some steps.
The following are two examples dialogues between a divorce mediator and a divorcing couples. The examples show the mediator attempting to exert control to avoid letting emotions interfere in the inherent financial conclusions.
Mediator: Do either of you want the house?
Jane: Well, he’s not getting the house.
Mediator: That’s not what I asked. Jane, do you want the house?
Jane: Of course I want it, it’s beautiful and worth a fortune.
Mediator: Okay, can you afford the house? Did you complete your budget like I asked?
Jane: Yes, I completed the budget. The only way I can keep the house is if he pays me alimony.
Mediator: What if the court figures that you can support yourself, and alimony isn’t going to be paid? What if your husband gets hit by a bus, and alimony ends? A house is also expensive to maintain and a lot of work. Who did all of the house maintenance?
Jane: Dick did.
Mediator: Do you want to mow the lawn, paint, and clean? If you don’t want to do those things, have you considered how paying someone else to do them will affect your budget?
Jane: You’re making it sound like I cannot have the house.
Mediator: Listen, I understand that your house has a lot of memories, and you are emotionally attached to it. However, a house is a huge financial responsibility. I don’t want you to walk into a situation that might financially ruin you. I’m also not sure of your motivation for wanting the house. What is the real reason you want the house?
Jane: I spent years decorating and remodeling it. I cannot bear the thought of Dick moving his new girlfriend into the home I created.
Mediator: Okay, that’s pretty easy to understand. Let me guess. If Dick keeps the house or argues that he will keep the house, there is no way you will be able get past the mental image of her enjoying what you created?
Jane: No, I will make him pay for it.
Mediator: And if he agrees that the house will be sold, and you two split the proceeds?
Jane: Then I don’t care.
Mediator: I’ll make sure Dick gets the message.
[Dick did get the message, and the house was sold. Although he knew that he could have afforded the house, he wasn’t sure that he could have survived the divorce process.]
Bob: The house is worth $130,000 after the mortgage. I did most of the work on it, and I want it.
Beth: It’s worth more than that, and you did most of the work? That is so much bologna. Who painted it? Who spent hundreds of hours wall-papering it, picking out carpet, and where were you when I retiled the bathroom?
Mediator: Hold it. What I’m hearing is that you both want the house. Is that correct.
Beth / Bob: Yes.
Mediator: Have you completed your budgets?
Beth / Bob: Yes.
Mediator: These budgets indicate that taking possession of the house by either one of you alone is going to be risky financially. Neither budget will survive if you run into unexpected expenses.
Bob: I can make it. I’ll work all the overtime I can. I’m taking the house.
Mediator: Okay, how are you going to pay Beth for her half of the house? Half of $130,000 is $65,000. Can you write her a check for that amount? Do you have other assets you can give her to compensate her for her share?
Bob: No. I’ll just refinance the house.
Mediator: Are you sure you can do that? Think about it. Didn’t the bank agree to lend you the money for the house based on both of your earnings? Is it likely that they will refinance using just your income?
Beth: We just barely made it when we first bought it.
Bob: Beth will just have to take payments.
Beth: You really expect me to trust you? No way.
Bob: I’ll get a second mortgage.
Mediator: Your budget doesn’t indicate that you have the ability to pay a second mortgage. Besides, even if you could, Beth will still remain liable on the first mortgage, and it appears that trusting you to continue making the payments may be an issue.
Beth: No kidding.
Bob: This is ridiculous. There’s no way out of this situation. Neither one of us can afford the house and pay off the other person at the same time.
Mediator: That’s right.
[Seeing the light and coming to terms with it took a long time for Bob. Beth got it almost immediately. Eventually the house was sold.]