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Part 3 - Negotiating the Sale or Buyout of the Family Residence

By Terri Breer

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Whether the parties have agreed to sell the Family Residence, or one spouse is going to “buyout” the other spouse’s marital interest in the home they will want to consider the following before they negotiate the final settlement terms and conditions regarding the disposition of the Family Residence:

• Are they emotionally ready to negotiate with the other party?
• Have they gathered sufficient legal and financial information for wise decision-making?
• Have they generated options based on the total marital estate and incorporating a global perspective?
• Have they had sufficient opportunity to consider the input of financial advisors and real estate professionals?

If they take the time to study their options and understand the factors related to their decision making the couple will be empowered to negotiate a better settlement outcome.

Managing Emotions

Moving out of the Family Residence may trigger a flood of emotions for one or both of the parties. The parties may be losing their dream home, or perhaps the home represents the successful culmination of having scraped and saved for many years to be able to qualify for homeownership. They may have invested “sweat equity” in their home having spent long weekends completing home improvements or landscaping the property. The couple may have best friends living next door, and their children may have many playmates in the neighborhood.

The garage or a spare room may be where one party carries on a hobby, or the garage may be doubling as a machine shop, a motorcycle storage facility, or it may be husband’s “man cave.” One party may have hoarder tendencies and they may experience significant stress over having to part with all their “stuff” stored at the residence. Following the Coronavirus pandemic, many employees and self-employed individuals are now working remotely from their homes. The spouse working from home may have significant anxiety over having to find and relocate their workspace. One party may have already moved out of the Family Residence prior to listing the home for sale and may worry that the spouse remaining in the home will not carry out the tasks related to showing the home to prospective buyers.

The uniqueness of homeownership and the sense of loss that accompanies moving out of the home may trigger debilitating intense emotions that only add to the stress of selling the home. One or both parties may need to meet with a divorce coach, their therapist, or another mental health professional to help them manage their emotions during this challenging time.

The parties will want to address their emotions, fears, and concerns as they negotiate the terms and conditions of their settlement. The party who is moving from the home might request that they delay the listing date so that he or she will have additional time to move personal property from the home. The parties will want to be sure they have provided enough time to determine where they may be relocating after the close of escrow, particularly in a hot market where the realtor believes the home will sell within one or two weeks of listing. The party who is concerned about the tasks related to the sale of the property might offer to assist with readying the home for an open house by offering to take custody of the parties’ dogs for the weekend so that they avoid any pet problems when the agent is showing the property. Some of these agreements can be stipulated in the settlement, and other times the couple just needs to identify and discuss these issues so that they have realistic expectations regarding the tasks related to their agreed disposition of the family residence. If they take the time to address these issues it will help them manage their emotions and will assure better decision making.

Gathering Legal & Financial Information

The parties will also benefit if they have sufficient legal information regarding the law applicable to the valuation of marital assets so they can make informed decisions. In California, when the family law court determines the fair market value of the property, the court will not reduce the fair market value of the family residence by the typical costs of sale or consider the potential capital gain that would be realized upon its sale; however, when parties are making their own agreements regarding these issues, the parties can discuss a more flexible process for determining the fair market value of the property.

For example, suppose the husband is refinancing the family residence and will be buying out his wife’s equity. If the agreed fair market value of the property is $1,200,000 and the mortgage is $300,000 then the gross equity in the property would be $900,000. The buyout would be equal to $450,000; however, sometimes the husband will argue that the amount of his buyout should be reduced by the sales commission and other costs of a hypothetical sale of the property. He may propose his wife discount the buyout amount because if the parties were to sell the home, the sale proceeds would be significantly reduced by the costs of sale. He may propose a 7% discount equal to $84,000 which would reduce the net equity from $900,000 to $816,000. If a discount is applied to the fair market value of the property, then the spouses' adjusted share of the net proceeds will equal $408,000 instead of $450,000. The husband may want to propose that he pay the other spouse an amount that is between $408,000 and $450,000. The husband may also want to negotiate a further discount of the buyout amount based on the capital gain that he will realize on his future sale of the home.

If the parties are contemplating a delayed refinance of the property, the parties may want to negotiate a way to share the risk that the property may appreciate or decline in value during the agreed delay. Suppose the parties agree that the wife will have three years to refinance the home and to obtain the funds to buy out the husband's interest. Will the parties use the current value of the property, or will the husband receive interest on the buyout over the next three years? Is the husband willing to accept the risk that the property may appreciate significantly during the delay, or will he want to include a provision in the settlement that will provide for an appraisal of the property at the time of the refinance to determine the amount of the buyout at the later date?

A Global Perspective Is Important

While the couple may decide to treat the home as a “stand-alone” issue to be resolved independently from the other issues in the divorce this strategy is a mistake. Since the home may be the most important and valuable piece in the divorce settlement puzzle, the disposition of the Family Residence should not be resolved in a vacuum.

Accordingly, it is essential that the parties prepare an inventory and valuation of all the separate and community property assets and debts and that they gather information regarding their income and expenses before negotiating the final terms and conditions related to the Family Residence.

If the parties have a thorough understanding of the marital estate they will be able to generate more settlement options. The party staying in the home may decide to transfer their share of a community bank account or retirement asset to the other party's side of the marital balance sheet in order to reduce the equalizing payment required to fairly divide the marital estate. If they are aware of all the debts and obligations that they will be dividing through the division of the marital estate, they will have a better understanding of their debt service and budget post-divorce. If they are trying to qualify for a new mortgage they may need to negotiate a reduction in the community debts they will be assigned in the settlement in order to qualify for the refinance. The negotiation of child and spousal support will have to be determined before the parties can determine the income that will be available to qualify for a refinance, purchase a new home or lease a new residence.

If the parties do a comprehensive and accurate job of gathering all the relevant information, they will be able to make more strategic decisions regarding the family residence as part of the larger global marital settlement.

Consult with Financial Professionals

The party who is going to keep the home will need to determine if they are able to qualify for a new mortgage before they negotiate the details of the refinance process with their spouse. As soon as the party decides that they want to keep the home, they must immediately consult with a mortgage professional to determine whether qualifying for the refinance and financing the buyout is a realistic option.

Based on the information provided by their mortgage agent, the parties may discover that the spouse will not be able to immediately qualify for the new mortgage. If more time is needed, then the parties can discuss other options that include a delayed refinance period. For example, if Mom's income is insufficient to immediately qualify for a new loan based on her income and the amount of support she anticipates receiving she may propose that Dad agree that he will give her additional time to secure full-time employment or a better paying position. The mortgage professional may suggest that the refinancing party consider using other assets in the marital estate to generate additional income to qualify for a new mortgage. Absent this suggestion, the party may miss the opportunity to negotiate a property settlement that will award them a rental property, an annuity, or another income-producing asset in their marital estate that will provide the necessary income for the refinance.

In those cases where the party can afford to refinance the existing mortgage, but they are unable to pull out sufficient equity to also fund the entire settlement payment, the mortgage professional's guidance will assist the party in identifying other options for funding the buyout. The party who learns they can afford to pull out $50,000 through the refinance can then decide to transfer the necessary funds from a community savings account or a portion of their community interest in a 401k to their spouse to reduce the buyout amount to a manageable sum.

They may also want to consult with a financial adviser or CDFA once they have all of the information regarding the monthly expenses related to homeownership so that they can determine whether their budget is going to be manageable when they take on sole responsibility for the mortgage, real property taxes and maintenance costs related to keeping the home.

Parties Should not be Vilified for Changing Their Mind

Sometimes during the negotiation process, the party may realize that they are not willing to make the necessary sacrifices to keep the home. The party may discover as they negotiate more details related to the overall settlement that they do not want to make the budgetary and lifestyle changes that will be required for them to afford to keep the home.

By having a comprehensive understanding of their overall marital estate the party who is contemplating the details of a proposed transfer of all their retirement assets in order to keep the house will be able to determine if such a strategy is prudent. The parties may want to revisit their initial decision to keep or sell the family residence by reviewing and reconsidering all of the factors that were described in Part 1 and Part 2 of this article. Developing, evaluating, and revisiting settlement options should be encouraged.

Neither party should be vilified for changing his or her mind regarding this important asset. Often when someone changes their mind midstream after having “agreed” to another disposition, the party who has relied on the party’s prior “agreement” will treat the spouse as having reneged on a prior agreement, or of acting less than honorable by having a change of heart. While there will be some frustration and inconvenience suffered by the other party when confronted with the new position of their spouse, the decision regarding the disposition of the home must be a thoughtful one. Having a change of heart should not be the source for condemning the actions of the party as having been motivated by bad faith. While this may be true in some cases, most of the time when a party makes a substantial pivot from their original position, it is simply the result of having the benefit of more information and time to complete a thoughtful decision-making process.

When you commit to a cooperative mindset, choose a sensible dispute resolution model and assemble a team of divorce professionals to guide you through the process, you and your spouse will be empowered to make wise decisions regarding the termination of your marriage.

Call now to schedule an initial consultation with one of our Divorce Attorney Mediators.

Secure a bright future for your family.

Breer Law Offices

7700 Irvine Center Drive,

Suite 800,

Irvine, CA 92618

Phone. 949.788.2992

Fax. 949.788.2993

Email. terri@breerlaw.com