Home Sweet Home Not Always Sweet When Selling A Home During Divorce
Many divorcing couples are faced with a common problem – who gets the house? When there are no minor children involved, the decision is often a function of economics. Because two households are more expensive to maintain than one, most divorcing couples will experience a decrease in their lifestyle after the case is over, and that typically means moving out of the 5,000 square foot $1,000,000 “marital” house and into two smaller, more budget friendly homes.
Beyond economics, there are often emotional and psychological reasons why each party either wants to stay in the former “marital” house or doesn’t want to stay. Reasons someone might want to stay include happy memories, comfort or convenience. Reasons to leave could include the memories being too painful or the desire for a fresh start. As home owners know, real estate is an illiquid asset that can take quite a while to sell depending on the time of year. Additionally, selling a home is time-consuming, and there are also significant transaction costs involved in the process.
In my experience, most divorcing couples just want to “sell the house and split the proceeds”; however, it may not be that easy. There are many ongoing expenses and operational issues that need to be thought through pending the sale. Usually it makes economic sense for at least one of the parties to remain in the house after the divorce is over and pending its sale. But, this creates complications that should be addressed in a settlement agreement so that post-Judgment disputes can be minimized or avoided.
First, parameters should be set around the person’s continued occupancy of the house post-Judgment, including, without limitation, good faith obligations to keep the house clean and orderly to facilitate the sale and to work with brokers and prospective buyers for showings, open houses and the like.
Second, the title of the house should be addressed. Often real estate is titled in some form of joint tenancy or with rights of survivorship. If one party predeceases the other party prior to the sale, that deceased party’s interest in the property could pass automatically upon death to the surviving party. Thus, efforts to sever joint tenancy may need to be made and the parties should consider titling the property as tenants-in-common. Tenants-in-common may be used to give each party an undivided percentage ownership in the property free and clear of the interest of the other party. Additional provisions restraining each party’s ability to alienate, transfer and/or further encumber the property may need to be included in the settlement agreement.
Third, payment of the various expenses related to the houseshould be addressed in detail. The core “operating expenses” of maintaining the house, such as the mortgage payment, real property taxes, homeowners’ insurance, and homeowners’ association dues (if any) should be specifically identified and responsibility for timely payment should be addressed. The current outstanding balances of any mortgages, lines of credit, or other encumbrances should also be identified with specificity. A process should be put in place for dealing with any capital improvements and major repair/maintenance decisions. Often a threshold dollar amount is used to define what is minor vs. what is major and who is responsible for what. There may be other expenses associated with selling the house, such as staging, landscaping, expenses that result from a prospective buyer’s home inspection, and removing personal property that are incident to the sale process and should be considered. Each party should also confer with their tax accountant regarding the ability to claim itemized deductions related to the house pending its sale.
Fourth, a time horizon should be considered relative to each party’s obligation to contribute to the expenses related to the house and related to a party’s exclusive use and occupancy of the house. Provisions that shift responsibility for payment for non-compliance or for payment of attorney’s fees to enforce compliance may incentivize people to hold up their end of the bargain. The party not residing in the house post-Judgment should be granted limited but reasonable access to the house to assist in facilitating the sale and to be able to inspect any potential capital improvements or major repair/maintenance items.
Fifth, a process should be put in place for dealing with the initial list price, changes to the list price, the broker, changes to the broker, and decisions to accept, reject, or otherwise negotiate offers to purchase the house. Because time is usually of the essence in residential real estate transactions, there should be specific provisions regarding the parties’ obligations to accept certain offers, such as full-price or all cash offers, or offers made within a certain percentage of the then current list price.
Sixth, the division of the proceeds received from the sale of the house should be specifically detailed in the settlement agreement. Typically real estate brokerage commissions, attorney’s fees for closing, seller’s title expenses and title insurance, and transfer stamps are paid first, followed by complete discharge of any mortgages, lines of credit, or other encumbrances, and then followed by distribution of the remaining proceeds to the parties in some proportion. Mutual written consent of the parties or their attorneys, or an order of court upon proper notice, petition, and hearing, may be needed to distribute the proceeds.
Finally, the court should retain limited jurisdiction to enforce the terms of the settlement agreement and to adjudicate potential post-Judgment disputes that may arise between the parties relative to the sale of the house.
In closing, the divorce process is almost always complicated, with the sale of the home being at the top of that list. Divorcing parties should walk away feeling each got a fair amount for the place they lived a substantial part of their lives, perhaps raised children, and at one time felt it was a comfortable, happy home.
J. Matthew Linstroth is an Associate with Katz & Stefani.