When divorcing couples want to minimize the impact on small children, one spouse very often buys out the other spouse and keeps the family house in a divorce.
In this routine, the custodial parent buys out the noncustodial parent so that the children can stay in the house. The regime provides continuity and stability for the kids. Moreover, the divorcing spouses are not at the mercy of the market.
In a buyout, an appraiser determines the fair market value of the family house because the transfer does not involve a real estate agent. A real estate agent, however, can provide information about recent sale prices in the neighborhood for comparable houses. These are often called “comps” (for comparable). Comparable houses are not always the best way to determine the fair market value of a house, nor is an online estimate (such as Zillow.com or eappraisal.com)
An appraisal is expensive, costing about $300 to $500 for a formal appraisal and report. If spouses disagree about the value, a formal appraisal is a good way to settle the question. If the appraisal doesn’t work, the parties must ask a judge to decide the value of the home. The judge often relies on the appraiser’s report, or if there are two appraisals, a judge may average of the two.
However, in any buyout, each side faces risks. The selling spouse may lose out on future appreciation of the house; the buying spouse runs the risk that the housing market may slide.
Moreover, a buyout can also be a financial stretch for the buying spouse because a house is a barren asset that pays nothing until it is sold, and carries costs (taxes and maintenance) regardless of any appreciation.
As a rule, the spouses negotiate the terms and condition of the buyout as part of the divorce settlement agreement. Commonly, the buying spouse either pays money to the selling spouse by refinancing the house with a new mortgage loan. Sometimes the buyer trades off other marital property worth as much as the selling spouse’s share of the house. For example, the custodial mother might keep the house in exchange for her share of marital investments and her husband’s pension. Sometimes a buyout can happen over time.
The spouses agree on the fair market value for purposes of a buyout, they may decide to adjust it, for any of a variety of reasons. Here are a few common adjustments:
> Broker’s fee. Sometimes the spouse deducts the standard broker’s fee from the buy out price because the seller may incur these fees later when the house is finally sold on the market.
Some states prohibit this, which means that the buyer pays all the closing costs, including the entire broker’s fee, whenever the property is sold.
> Deferred maintenance. The cost of any deferred maintenance can be leveraged in negotiating a buyout price. For example, the buying spouse may ask the selling spouse to reduce the price to pay for work on the house put off during the marriage, or the selling spouse who owes money as part of the settlement may lower the price to even out the property division.
> Spousal support. The spouses may use the price to negotiate reduction in spousal support; for example, the selling spouse may lower the buyout price to avoid paying spousal support. If the spouse so-called supported spouse is buying out the paying spouse’s share of the house in order to stay there with the kids, he or she might agree to give up spousal support if the paying spouse sells his or her interest for a lower-than-market-value price. This routine, however, may negate the tax advantages paying alimony.
> Refinancing. In most cases, a buyout goes hand in hand with a refinancing of the mortgage loan on the house. Usually, the buying spouse needs a new mortgage loan in his or her name alone. The buying spouse takes out a loan to pay off the previous loan and pay the selling spouse what’s owed for the buyout. For example, the couple has a mortgage loan with a principal balance of $100,000 and $100,000 in equity. This requires a new mortgage of at least $150,000 — $100,000 to pay off the original loan, and $50,000 cash (half of the amount of equity) to seller spouse. The transaction moves like a sale to a third party, with the seller spouse signing a deed transferring ownership of the property to the buyer spouse, and an escrow company or an attorney taking care of the paperwork and transfers of funds.