What happens to the house in a divorce?

Home equity is often the largest asset for US households, often making the disposition of a house the major sticking point in divorce negotiations.

And a highly emotional one too, says Michelle Smith, CEO of Source Financial.

“It's very, very emotional, especially if a couple has been married a long time and you've had your residence for 20 or 30 years and there's children and grandchildren. So there is a disproportionate reaction sometimes to the real estate on the balance sheet,” said Smith. 

When it comes to young kids currently living in the home, their ages must be factored into the discussion, according to Smith. Is it worth waiting to sell the house so a child can finish elementary or middle school, for example, so as not to further disturb their education? Or maybe wait until all the kids leave for college and the nest is empty depending on their ages.

“There are triggers and inflection points that you can work an agreement around. But this real estate issue and divorce takes cool heads, level heads, a team of people, not just lawyers fighting it out for you. It is a loaded topic,” said Smith.

Coming to an agreement on the appraisal is essential as that is where games can often be played. Each side has its own views on the value of the house and very often their own realtor or appraiser.

To circumvent shenanigans from either side, Smith suggests an early agreement on what that appraisal mechanism looks like. Maybe each person calls their own realtor. Maybe they do an average of appraisals.

“It takes thought, it takes a methodology, it takes cool heads, and it really takes communication,” said Smith. “This is where you really need to come together to strategize.”

And don’t forget about the mortgage either. Can it be assumed? Refinanced?

That takes a call to the bank, which is why Smith prefers to get on the phone with the client and ask the bank what would it take to have this particular mortgage. 

What about co-owning a home after the divorce? Like a summer home?

“I will say it's an outlier for that to work over one year, but maybe if it's February and there's a Hamptons house and everybody wants to enjoy it for a last summer,” said Smith. “But you need to set up ground rules about cohabitation and who's allowed to be there and who's not. Surprises in divorce are bad.”

It’s the role of the financial advisor to foresee any potential surprises, Smith says. The wealth manager needs to bring up all these topics and scenarios in advance with their client to make sure they are spoken for later.

“I like to frame a problem using math,” said Smith. “So let's say we're talking about a $200,000 discrepancy on the value of two homes. And the homes are worth $5 million. $200,000 divided by $5 million is 4 percent. If I can help figure out your half of $200,000 in a less emotional way, then just frame it in math.”