Negotiating a House Buyout at Divorce
"Buying out" your spouse is an option if you want to keep the house after a divorce.
What is a "Buyout?"
One way that divorcing spouses deal with the family home is for one spouse to "buyout" the other’s interest. (Other ways are to sell the house or to continue to co-own it.) Often, the custodial parent buys out the noncustodial parent so that the children can stay in the house. The advantages to this are obvious: The house provides continuity and stability for the kids, and you don’t have to sell if market conditions aren’t good.
However, in any buyout, each party bears a risk. The selling spouse may lose out on future appreciation, and the buying spouse may end up feeling the price was too high if the property depreciates in the future. A buyout can also be a financial stretch for the buying spouse.
A buyout can occur over time, with both spouses keeping an interest in the house for a while—whatever agreement you make about a gradual buyout would need to be included in your settlement agreement. But often, the buyout is completed as part of the divorce settlement. The buying spouse either pays money to the selling spouse—usually by refinancing the house and taking out a new mortgage loan—or gives up other marital property worth about as much as the selling spouse’s share. For example, one spouse might keep the house in exchange for giving up his or her share of marital investments and retirement accounts.
How do we Determine Value of the Home?
Because you won’t have a real estate agent involved in a buyout, you’ll have to use another method to determine the fair market value of the property. If you’ve recently had the house appraised, or if you and your spouse have similar ideas about its value to begin with, you might not have to fuss too much about this.
But, if you and your spouse can't agree, or you want a bit more information, you can ask a real estate agent to provide information about recent sale prices in your neighborhood for houses comparable to yours (these are often called “comps”). You can also go online to one of the sites that will estimate your home’s value if you type in your address, like zillow.com or eappraisal.com.
But, there are a lot of differences between houses, and comps are not always the most accurate way to determine the fair market value of a house, nor is an online estimate. The most accurate method is to hire a real estate appraiser. This will be more expensive—probably $300 to $500 for a formal appraisal and report —but if you disagree about the house’s value, it’s a good way to settle the question. If the appraisal doesn't work, you'll have to head to court and ask a judge to decide the value of the home. The judge will likely rely on the appraiser's report, or if there are two appraisals, a judge may use the average of the two.
Once you’ve agreed on the fair market value for purposes of a buyout, you may decide to adjust it, for any of a variety of reasons. Here are a few common adjustments:
Although you won’t be hiring a broker, the buying spouse sometimes negotiates to have an amount equivalent to half of the standard broker’s fee deducted from the agreed value, because the buying spouse may incur broker’s fees later, when the house is finally sold.
Some states don’t allow this, though, requiring that the buyer pay all the closing costs, including the entire broker’s fee, whenever the property is sold. Your lawyer or mediator should be able to tell you what the rules are in your state.
If you’re doing your divorce yourselves, this would be a good time to look for advice from an attorney or knowledgeable real estate agent. For now, just know that if you foresee selling the property in the near future, you may want to consider continuing to hold it jointly until then, to avoid losing out when the closing costs come due.
If there’s work on the house that you put off during the marriage, which needs to be done soon, the buying spouse can try to persuade the selling spouse to knock the buyout price down somewhat. Likewise, if the selling spouse owes the buying spouse money to even out the property division, lowering the sale price is one way to take care of that debt.
Spousal support considerations
There’s also the possibility that the selling spouse might agree to a lower purchase price to avoid paying spousal support. For example, if the spouse that's entitled to support ("supported spouse") is buying out the paying spouse's share of the house in order to stay there with the kids, the supported spouse might agree to give up spousal support if the paying spouse will sell his or her interest for a lower-than-market-value price. Be careful with this, however—it may negate the tax advantages that sometimes come with spousal support.
In most cases, a buyout goes hand in hand with a refinancing of the mortgage loan on the house. Usually, the buying spouse applies for a new mortgage loan in that spouse’s name alone. The buying spouse takes out a big enough loan to pay off the previous loan and pay the selling spouse what’s owed for the buyout.
For example, you and your spouse might have a mortgage loan with a principal balance of $150,000, and an equal amount of equity ($150,000) in your house. If you are buying out your spouse’s half of the equity, you would need a loan for at least $225,000. You’d pay $150,000 to pay off the original loan, then pay $75,000 cash (half of the amount of equity) to your spouse to become the sole owner of the house. The transaction would proceed just like a sale to a third party, with your spouse signing a deed transferring ownership of the property to you, and an escrow company taking care of most of the paperwork and transfers of funds.
Most likely, the transfer of deeds and money will happen all at the same time, at a “closing” with the escrow company. If you are the selling spouse, this is the best scenario for you. If there’s not going to be a closing, make sure the refinance is completed and you’ve gotten your money before you sign a transfer deed.
If you’re the buying spouse, make sure you complete a title search to make sure there are no liens (legal claims—for example, for back taxes) or other “clouds” on your title. The title company handling the closing should do this for you.