The Marital Home in a Hot Market – Do I Stay or Do I Go?

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Jen Paterson

July 28, 2021

I am the exception. Not as it relates to the chaos and confusion that most people feel during divorce; rather, to the trading and moving of houses in the aftermath. When the reality of my own impending divorce set in, I tactically chose to take on the risk of our marital home…immediately putting it on the market and downsizing into a more modest in-town home – all before the Divorce Decree was stamped. The fact that this “trade” worked out in my favor had little to do with skill. The market just happened to go my way at the right time(s). I was lucky.

That said, after over two decades in institutional finance, it was in my nature to run a dozen scenarios of the potential risks and rewards in ridiculously detailed spreadsheets, so I took the risk with eyes wide open. At the time, I was otherwise unable to think clearly, nor could I see straight due to the shock of my husband’s sudden departure. I found myself with two toddlers to care for, and a stressful job in institutional finance that I intended to keep, but was ultimately unable to, due to my situation.

For most people experiencing divorce, the very first question is almost always about the marital home. When there are children in the mix, making a financially prudent decision gets even tougher. The equity in the marital home is oftentimes the biggest component of a couple’s net worth (with retirement accounts coming in a close second). And, when you add a “hot” real estate market to the mix, a decision about this important asset has even greater financial consequences.

It’s no secret that real estate values are up enormously all over the United States. Here in Fairfield County, we are seeing home value increases of 19%, 16% and 22% in New Canaan, Darien and Westport, respectively, and cashing in on the frenzy is tempting. According to Christine Saxe of Saxe & Bryan Properties at COMPASS, “Pretty much across the board we've been hearing from clients that they want to sell to capitalize on higher home values but are worried about buying in this market. The more flexibility a client has on location, openness to renting if they can't find a house to buy, and willingness to do some work on what they buy, the better.”

Net worth is always lost in a divorce, so if you have an advocate or financial advisor who can help you mitigate the damage (without transferring all or most of what’s left to the lawyers) you have succeeded.

So, what’s the “right” thing to do with the house when you’re going through a divorce? While the answer depends on each person’s personal circumstances and priorities, there are a few key items to consider that are often overlooked in the early stages of the divorce process:

Keeping the Marital Home

Will you qualify on your own for a mortgage?

A mortgage company will not typically allow the debt to be assumed in its entirety by the spouse who chooses to keep the property, and oftentimes it is difficult for the remaining spouse to qualify for a mortgage on their own. It’s also important to note that most banks will not grant income credit for spousal support until it has been received consistently for 2 years. Many banks will treat it as secondary income, and only include 50-60% (even after 2 years of receipt).

Can you afford to maintain the home?

I almost always double (or even triple) check my client’s own budget estimates. Even the best of us forgets that it’s not just about the mortgage and taxes. If you don’t have 25+ line items of monthly expenses, you are forgetting or underestimating something. Better to know that now, before you make a decision – not once you’re stuck and cash strapped, facing monthly obligations you aren’t equipped to keep.

Would a Spousal Buyout Program work for you?

If both spouses are on the deed and the terms are spelled out in a legal separation agreement and purchase agreement, you can borrow up to 95% of the value of the home in order to buy out your spouse and take over sole ownership of the property.

What about Joint Ownership?

Leaving the division of assets as a loose end, can be painful emotionally and financially. In most cases I’ve seen, the asset can become weaponized which can result in neglected home maintenance and a sabotaged sale (price, timing, or both). When one party gets control to sell or maintain, not only is the risk/reward much more easily calculated, but each party can move forward with complete financial independence.

Do you have an Exit Plan?

If a client is intent on staying, regardless of the financial circumstances, or even if the numbers work (for now), defining an exit plan is imperative. Most primary caregivers overestimate their ability to maintain their career and earning power or start a new career after having been out of the workforce. The divorce process itself is a major stressor for most, but when the primary caregiver is also responsible for school obligations, homework help, taking kids to doctor’s appointments, driving to activities, and even managing full-time childcare, it can be overwhelming and disruptive to your ability to earn money as you once could.

Exit Plan Considerations

- Define your downside and stick to it. How much money are you willing to lose while you wait for the kids to graduate? Hedge fund managers would never establish a long position without first understanding the risk/reward profile and defining the point at which they “cut bait.”

- Do you have the cash reserves to maintain the home properly for a set period of time?

- Can you anticipate realistically recouping some or all of that money in a future home sale?

- Do you have enough cash reserves to deplete while also protecting your own future and retirement plans? A good financial advisor will be able to:

• Run data-based scenarios to help define your potential downside risk.
• Demonstrate how much of your retirement savings and future income you may be giving up in order to stay in the marital home.
• Explain what kind of future income potential you may be able to generate with the cash equivalent of the equity in your house.

Selling the Marital Home

Have you factored in all of the costs of selling?

“I have a million-dollar home!” you say to yourself, “I’ll have plenty of money when I sell it!”. However, if you are like most high-income households, there is usually a mortgage and other oftentimes unforeseen expenses. To put it simply, if you are selling a $1,000,000 home in CT and (for example) 75% of your home is mortgaged, you might only wind up with a check of $168,000. Key items to always factor in are:

- HELOCs (Home Equity Lines of Credit)- Unfortunately, many women I know have learned through the financial discovery process that their spouse has taken out additional debt on their home via home equity loans. The earlier you can learn this, the better position you will be in to make tactical financial decisions.

- Capital Gains- Particularly in a “hot” market, be sure to factor in any potential capital gains taxes. Consider your home’s cost basis, use and ownership period. Married couples can exclude $500,000 from capital gains and single adults can exclude $250,000. This exclusion is allowed only once every two years, and the residence must have been used for two of the last five years.

- Commissions- In Fairfield County, this is typically 4.5-6%.

- State and Municipal Taxes- 0.75% up to $800,000, plus 1.25% up to $2,500,000 and 2.25% over. 0.25% Municipal tax.

- Legal Fees- $1,500 - $5,000

- Moving Costs- Size and distance dependent but rarely insignificant.

It is crucial to understand and examine all the factors before you decide on whether you’d like to keep or sell your marital home. Not only so you can set yourself and your family up for a new life, but so you can sit confidently at the divorce negotiating table knowing the “how and why” behind what you want and what you need.

Beyond the financial aspects of this important decision, there are emotional factors that can be just as important. Balancing the financial realities with your very real emotional needs is the key to not only making the right decision but feeling good about it and knowing you’re doing the right thing for you and your family.

Here are just a few examples of some “Stay or Sell” scenarios I’ve come across along the way (obviously names have been changed):

- Cindy is a 40-year-old mother, with three young children at home. Cindy was initially insistent upon keeping her marital home. After we mapped out what cashing out could look like if invested properly over the long-term, she came to grips with the idea of selling. A few months after settling into her new rental, she has expressed an unexpected sense of freedom. She feels lighter and more financially flexible without the burden of a large mortgage and maintenance expenses that would eat away at her savings, and she feels empowered to know that her financial future and retirement goals are fully achievable. She also can’t believe the new friendships her kids have made in their local condo community!

- Anne is a 63-year-old mother of 4 full grown children and 6 grandchildren. Anne came to me with a condo in Greenwich and a vacation home in North Carolina. Anne assumed she had to sell both homes, because she hadn’t earned her own income in decades. After we ran through the numbers, it became clear that keeping both properties could work. With rental rates so high, renting one to help maintain the other could afford her the opportunity to accumulate more equity in both properties, while still staying close to her grandchildren.

- Jamie is a 54-year-old mother of 2 children in college. Jamie insisted on staying in her marital home as part of the divorce, feeling it would be too disruptive to the children to move. Without having a professional to help walk her through the options and the long-term financial consequences, she was acting on emotion alone. Unfortunately, the home wasn’t properly maintained, the market took a severe downturn, and she was forced to sell well below where she had estimated – netting less than $50,000 on what was once a $1.3MM home. Suffice it to say, I see this happening frequently.

When the kids grow up and you are left without a viable path to retirement, you may ultimately become a financial burden on those very kids you were trying to protect.

As every flight attendant will tell you…always put your own oxygen mask on first before attending to others.

In that same spirit, be sure that you have a financial advisor who can take the time to understand your unique situation. A little forethought and planning may help you breathe easier for a lifetime.

Jen Kane Paterson, CDFA ®, Financial Advisor

Director of Wealth Management

Office Phone: (475) 666-0550

Mobile Phone : (917) 526-1037

Email: jen@waterwaywealthadvisors.com

www.waterwaywealthadvisors.com

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