Negotiating a House Buyout at Divorce

If you and your spouse own a home, it must be divided when you divorce, just like the rest of your property. But unlike many other assets, the question of what happens to the family home can raise complicated emotions and challenges—especially when children are still living there.

Most divorcing couples will do one of the following:

• continue to co-own the house, at least for a while
• sell the house and split the proceeds, or
• arrange for one spouse to buy the other's interest in the house—a "buyout."

If you and your spouse can't agree on what you'll do with the house, a judge will decide for you and issue an order as part of the overall property division in the divorce. Usually, judges will simply order a sale, since that's the simplest and most straightforward option. So if you want to avoid a forced sale, you should do what you can to reach an agreement (more on that below).

Here's what you need to know if you're considering a buyout of the family home as part of your divorce.

What Is a House "Buyout?"

In a buyout situation, one spouse keeps the house after the divorce in exchange for something of value—usually cash or other assets representing the other spouse's share of the equity (more on that below). The other spouse's name is then removed from the title and the mortgage.

A buyout can happen over time, with both spouses keeping an interest in the house for a while. All details about a gradual buyout would need to be included in your settlement agreement or the divorce decree. More often, though, the buyout is completed as part of finalizing the divorce.

What Are the Pros and Cons of a House Buyout?

There are several reasons that couples may choose a home buyout when they're divorcing, especially:

• Keeping children in the home. Judges and most parents recognize that continuity and stability are good for children. One way to minimize the disruption and stress of divorce on children is to find a way for them to stay in the home where they've been living and the schools they've been attending. That's why some couples agree that one spouse (usually the custodial parent) will buy out the other's interest in the family home so their young or school-age children won't have to move. (Co-ownership after divorce is another way to achieve this goal of stability for children, but it has its own risks.)
• Taking advantage of market conditions. A buyout can allow divorcing couples to avoid losing money by selling the property when the housing market is bad. Conversely, one spouse might want to negotiate a buyout to keep the house and gain further appreciation in anticipation of a seller's market.
• Emotional attachment. Money isn't the only reason couples may fight about what will happen to their house. For a variety of reasons, many people have a deep emotional attachment to the family home, and one spouse may be especially committed to the idea of staying there.

There are also downsides to buyouts. The most obvious are the obstacles to refinancing or trading assets for a buyout (more on that below).

Even if you've overcome those obstacles to achieve a buyout, you run the risk of not being able to afford to keep the house—especially considering your financial status as a newly single person. Along with the new mortgage payments, you'll need to consider property taxes, maintenance costs, and insurance.

Also, each party bears some risk in a buyout. For example, the selling spouse might lose out on future appreciation, and the buying spouse might end up feeling the price was too high if the property depreciates in the future. There are also likely to be tax consequences if the buying spouse needs to sell the house at a later point.

How to Determine the Value of the Family Home at Divorce

Homesellers often rely on the advice of their real estate agent to set the sales price for their home. In a divorce buyout, though, you probably won't be working with an agent, so 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 do your own research online using estimates from sites such as Zillow or Trulia (beware that the home value estimates these sites provide can vary and fluctuate based on factors that might not apply to your home).

Another popular—and dependable—way to determine value is to hire a professional property appraiser. This will be more expensive—probably $300 to $800 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. Common negotiation points include:

• Real estate agent's fee. Although you won't be hiring an agent, 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. On the other hand, if you foresee selling the property in the near future, you might want to consider continuing to hold it jointly until then, to avoid losing out when the closing costs come due.
• Deferred maintenance. 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. There's also the possibility that the selling spouse might agree to a lower purchase price to avoid paying spousal support (alimony). For example, a spouse who's entitled to support might agree to give up spousal support in exchange for buying out the other spouse's interest at a price that's lower than market value. Be careful with this strategy, however—it might negate the tax advantages that sometimes come with spousal support.

How Do You Determine Each Spouse's Share of the Equity in Your Home?

Once you've agreed on the value of your home—or, if you couldn't agree, once a judge has decided for you—the next step is to determine each spouse's share of the equity in the property. The equity is the value of the home minus the remaining balance on the mortgage and any other unpaid debts against the asset.

Here again, you and your spouse may negotiate and come to an agreement about how you'll split the equity. But if you need to have a judge decide for you, the outcome will largely depend on your state's laws on dividing property in divorce, as well as your particular circumstances.

Some of those circumstances include:

• whether the home is at least partly considered separate property rather than marital property (for instance, if you or your spouse owned the home before you married, or one of you inherited the property)
• even if the house is one spouse's separate property, whether the other spouse or both of you made any contributions to it (such as by using marital property to make mortgage payments or pay for improvements), and
• whether you had a prenuptial agreement that included provisions about the property.

How Do You Get the Funds to Buyout Your Spouse?

If you're planning to buy out your spouse's interest in the family home, you have some options if—like most people—you can't simply write your spouse a check.

Trading Other Marital Assets for the House

It's common for the buying spouse to trade 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 their share of marital investments and retirement accounts.

Although this method will result in a balance of both spouse's allotments of marital property, it can pose a problem if there's a mortgage on the property. Transferring the title of the house into only one spouse's name (either by quitclaim deed or another form of deed recognized by the state) won't remove the other spouse from the mortgage. This means that the selling spouse would still be on the hook to the lender if the buying spouse fails to make payments on the house.

So, even if you and your spouse agree to trade other marital assets to balance out one spouse getting to keep the family home, you'll still need to make sure that only the buying spouse's name remains on the mortgage after divorce.

In rare cases, your lender might allow you to release—remove—the selling spouse's name from the mortgage, so that the buying spouse assumes all responsibility for the loan. Most lenders aren't willing to do this, and those that do allow it will require proof that the assuming spouse has the financial ability to continue paying down the mortgage without support from the spouse.

The most common way to ensure that the house is in only one spouse's name is to refinance. Refinancing can also provide you with the funds you need to buyout your spouse's interest.

Refinancing the House for a Buyout

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 (also called a "cashout refinance").

Here's an example of how you might calculate buying out your spouse's interest in your home.

You and your spouse have a mortgage loan with a principal balance of $250,000, and an equal amount of equity ($250,000) in your house. Assuming that you each are entitled to half of the equity, you would need a loan for at least $375,000. You'd pay $250,000 to pay off the original loan, then pay $125,000 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, you'll have to 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.

Refinancing When Interest Rates Are High

When interest rates are relatively low, refinancing might not result in much of a change in the buyer's monthly payments—and if you can get a lower interest rate than you previously had, it might even lower your payments.

But when interest rates are high or rising rapidly, refinancing can turn a once-affordable monthly payment into an unaffordable burden that makes a buyout impossible. Unfortunately, there often isn't much a divorcing couple can do to solve this problem. Selling the house and dividing the proceeds might be the the best option.

If you're facing high interest rates for a refinance, but you really want to stay in the family home, be sure to shop around to find the best refinancing rates. You could also consider:

• Reducing monthly payments by purchasing points. If the current interest rate would make the monthly payments too high, you could ask the lender about paying discount points—a one-time fee to reduce the rate. The downside is that you'll need to come up with cash for the points at closing. However, depending on your situation, you might be able to negotiate exchanging marital property for the funds to pay for points.
• Selling the home and getting a leaseback. In this situation, you sell your home to an investor. As a condition of the sale, you arrange to enter into a lease that allows you to continue living in the property after the closing. Just like any other sale, you and your spouse would split any proceeds at closing, and any existing mortgage would be paid off. However, you'd be able to stay for as long as your new lease allows. Try talking with a local real estate agent to see if this is an option that could work in your market. Alternatively, do some research on institutional leaseback buyers such as EasyKnock or Rentback to see if they buy homes in your area.
• Borrowing money from family (or friends). This is a good option if you're not able to qualify for a loan from a traditional lender. It might also be possible for the friend or family member to offer you a lower interest rate than a traditional lender. Whenever you borrow money from friends or family, it's essential to get the arrangement in writing. Consider working with a lawyer or company that handles interfamily loans, such as National Family Mortgage, to structure the arrangement.

Getting Help With a House Buyout

If you're doing your divorce yourselves, the process of dividing an asset as large as the family home can be a daunting task. A home is often a couple's largest asset—or their biggest burden. Whether you have a lot of equity in the home or are underwater, consider consulting with a family law attorney to make sure you're not leaving any money on the table. A family law attorney can help you brainstorm ways to make the terms of the buyout satisfactory for both spouses, or help you find a knowledgeable real estate broker if you decide that a buyout isn't the right solution for your divorce settlement.