How to Value the House and Split Home Equity in a Divorce
Author: Miod & Company
Date: February 18, 2022
Category: Family Law
Average Time Reading: 4 minutes
When going through a divorce, it’s essential that assets are split fairly. The most important decision to be made is the family home. Negotiating and arguing over this part of the deal may cause a lot of headaches for both parties.
As the conversation may involve more money than you can count, it’s necessary to reach a solution that both parties will agree upon.
Let’s talk about how you can value your house the right way and peacefully.
How is Equity Determined and Split Between Partners?
Property valuation during a divorce requires an accurate number representing the amount of equity.
The equity of the property is the home’s market value minus the existing debt and costs in dividing the assets. As you work towards a marital settlement, the court will need to know just how much it’s worth so they can divide it accordingly.
Usually, equity will be divided equally depending on state laws. However, situations including house inheritances or gifts allow for some deviation from the typical routine.
Either way, one spouse may not agree to an even split and cause some distress in the decision-making process.
If that is the case, you can agree on another figure that still somewhat resembles the true value of the property. Otherwise, it may cause a disparity in the marital estate.
Once a value is determined, you’ll be able to decide how it’s split between partners. Be sure to discuss contributions that may impact your share of the equity.
What Are Your Best Options?
Here are the main approved methods of how to determine home equity during a divorce:
- Full appraisal
- Broker price opinion
- Comparative market analysis
- Property tax assessment
- Refinancing the home
- Sell the house before divorce
- Taking out a loan
Most often, couples will receive an appraisal on the house to determine its value. This may or may not be required by your state, but is the most accurate option overall.
A BPO, or broker price opinion, is an estimated value reported by a real estate agent, broker, or an appraiser. It’s based on more subject values, such as the neighborhood, curb appeal, etc.
However, BPO is not considered an official representation of an appraisal nor does it always match the market value.
A comparative market analysis is similar to a BPO and also created by a real estate broker. Unlike BPOs, CMAs are determined by recently sold properties in the surrounding area, including its location, size, style, and condition.
Property tax assessments are used by your county to determine your tax contribution. Unfortunately, this method isn’t always the most beneficial as assessment values are only updated every now and then—not daily or even monthly.
This means that the assessment may be old and not a good representation of the value at this moment.
On the other hand, one spouse may want to purchase the other’s property interest which often results in refinancing the home. Doing so can remove a spouse’s name permanently from all documents and leave it all to the other.
If that isn’t an option you’d want to consider, selling the house is another way to go. If you can wait to break the relationship, you can close a deal on the house to change the amount of equity per person. However, some couples want to break it off as soon as possible and may require a faster option.
Lastly, one ex-spouse may take out a loan big enough to cover the pre-existing loan on the house and the other spouse’s owed equity. Other marital property can be exchanged for their ownership interest or instead of alimony payments; it’s a good idea to outline these changes in the divorce decree.
Nonetheless, taking out a loan still requires refinancing the house to make the other spouse no longer liable for any property debt.
In some instances, ex-spouses will want to be co-owners to benefit from appreciation of the property if they can live with being financially involved. If one partner forgets to complete a payment, they both may suffer the consequences.
The Next Step
It’s important to find the option that best suits your situation and have both partners agree upon it confidently.
You never know what to expect when valuing property during a divorce: you may fall into a negative equity problem where your house’s value is less than the mortgage amount you owe.
If your house has no equity at all, selling the house and leaving it behind may be the best option for you. At the end of the day, talking with an expert accountant or advisor can help you find the right way and do it fast.
At Miod and Company, we are here to help you and your spouse make that decision!
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