Divorce is usually difficult. Emotions run high and at the same time divorcing couples have the added problem of figuring out the property distribution. This is particularly challenging when the market is down. Divorce clients I have seen in the past year have lost 15–30% of their home value, leaving the equity slim to none—or worse, negative. During a down market no one wants to sell their house, often times their largest asset. Many divorcing couples are opting to keep joint ownership, hoping the market will turn so no one “sells” during a down market.
What about the flip side? What happens if you buy your spouse out of the house during an up market and are suppose to pay them back later when the market has dived? A Seattle colleague of mine told me about such a case recently. Here is the scenario:
Wife, wanting to keep the children in the home, keeps the house and agrees to pay husband his portion of the equity in the house in five years. Wife thought she could pay husband his $100,000, half of the equity at the time easily—or so it appeared at the time. Then along came the severe economic downturn and the house lost $300,000 in value, more than the original equity at the time of the divorce. Property settlements are final so wife still owes husband $100,000 for his portion of the equity in the house. If wife sells the house now, she will be lucky to break even, but she will still owe husband the $100,000. She has no other resources. He wants his money. Now what?
The lesson is that home ownership is an investment and as with all investments the value may increase but the value may also decrease, each situation has its risks and rewards and these need to be considered when negotiating your property distribution.
For some information check out: “Minimize the Financial Pain of Divorce.”