Divorce is a very difficult time emotionally and financially. Just from a financial end, on top of determining what to do with shared real estate, one also has to divest bank accounts, investment accounts, and debts. If you own several real estate investments, the process becomes even more complicated. In cases where you and your former spouse disagree on how to handle a property, the process becomes short of utter frustration. This article outlines some of the fundamental processes and decision making involved in buying out your spouse.
How does real estate and marriage go hand in hand in California?
Marriage in California is governed by community property law, which mandates that all assets acquired during the marriage be divided between both parties equitably and in accordance with their respective rights and interests.
In other words, all property acquired, purchased, or earned during a marriage is considered marital property, and upon divorce, both spouses must receive 50 percent of the property. For example, in a community property home with a value of $5,000,000 and a mortgage of $4,000,000, each party’s shares would equal $500,000.
Using the same example, the buying spouse would need to pay $4,500,000 (the remaining mortgage balance of $4,000,000 plus the equity owned by the ex-spouse of $500,000) in order to buy out the house. In most cases, this requires the buying spouse to apply for a new larger mortgage loan to pay off the previous loan and the ex-spouse’s equity, and then start paying off that mortgage.
There are instances when both parties want the property to remain in their hands. It’s important to be mindful of your spouse’s perspective. In most cases, real estate represents most people’s biggest assets, and it is always hard to part ways with your home.
There are a variety of reasons why one may wish to keep their family home. It is common for divorced parents to not want to change their children’s environment during such a turbulent time. Or in other instances, some may simply love their house or be attached to it and not be willing to give it up. Regardless, to retain the property, the spouse who wants to keep it must pay off the other spouse for their share and have them agree to a buyout.
This generally requires negotiations between both parties, something that neither wants to ensue after a divorce. However, for a successful divorce, remaining calm and composed throughout the entire process is key. Messiness only happens in cases where decisions are made emotionally rather than logically.
What’s the first step in a buyout?
The first step to keeping your home is identifying the value of your property. In addition to valuing the property, any loans or mortgages attached to it must also be assessed. Trying to determine the value of a home can be difficult. If you are having difficulty reaching an agreement, you might seek the assistance of a real estate agent who can provide data on recent sales in your area to help you determine the value of the property. If you want the most accurate valuation for your property, you may need to hire an appraiser.
You and your spouse may adjust the final valuation when agreeing on the value of the house based on a variety of factors. These include:
● There are a number of repairs to be made to the house
● The cost to the buyer in the case of a refinancing
● Fees to be paid to brokers in the future
Once you have determined a final valuation, you need to consider how buying out your spouse will affect your long-term financial well-being. It would be a shame if you gave everything up for the buyout of your spouse and found that you couldn’t cover the larger mortgage. You should be realistic about whether you can afford to buy out your spouse’s share.
If you determine a buyout may not be the best way to proceed, you might consider letting your spouse maintain their share and instead determine who will continue to live in the home and how that agreement will work.
If that also seems like a very difficult arrangement, then as in most instances, selling the home may be the best consideration, so that parties can start fresh. From a financial standpoint, consider any potential capital gains taxes when planning to sell your home. Tax professionals can help you determine this.
Consult a lawyer if you have significant questions
If you have high-value property, the property portion of a divorce can be complicated. A lawyer may be able to help you understand real estate agreements and other nuances. You may want to consult a lawyer for your real estate doubts, especially if the future of your house is unclear to you. If you’re still uncertain about this issue and want to speak to a realtor, you can schedule a time to speak to one of our real estate divorce specialists.
