The most common issue that parties negotiate when a Family Residence is part of their marital estate is whether it will be listed for sale, or whether one party will keep the home and “buyout” the other party’s interest. There are other options that the couple might consider, but for the most part the parties are weighing the two basic options of whether to sell or stay.
Sometimes parties will arrive at their first mediation session with the Family Residence already in escrow or listed for sale. Other times they have decided that Husband or Wife will keep the residence and they have calculated and agreed on how much money the party keeping the home will pay the other party as a “buyout” amount. The nice thing about these early decisions is that the parties are talking to each other and have been able to make agreements cooperatively without an attorney or a mediator assisting them. It is always good to applaud the self-determination of the parties in coming up with these agreements. Unfortunately, in many cases, the parties have made a particular decision regarding disposition of the Family Residence without understanding the implications of their decision, and it may be too late to look at other more viable options.
This article will focus on best practices in mediating an agreement that involves one party keeping the Family Residence in the division of the marital property. Next week I will follow up with best practices when the parties decide to sell the property, and Part Three will focus on the 3-Step Process that the parties should follow when they negotiate and document the details regarding the agreed disposition of the Family Residence.
By far, the best practice for mediating an agreement when one of the parties has a desire to keep the Family Residence is to ask and obtain thoughtful answers to the following questions at the beginning of the mediation process.
Top 10 Questions when a party wants to keep the Family Residence:
(1) What is the equity in the property? Have the parties agreed on the fair market value or is an appraisal going to be necessary?
(2) Have the parties sufficiently analyzed whether there are any separate property reimbursement issues that will affect the calculation of the buy-out amount? Are there any overdue maintenance issues, code violations or other problems with the condition of the home that will affect the valuation of the home?
(3) Are there other financial issues that will affect the property valuation? Is there a significant capital gain that might be realized when the party keeping the Family Residence sells it in the future? Have the parties seen a title report regarding the property that might reveal additional liens or are there unpaid real property taxes?
(4) Can Husband and/or Wife qualify for a new mortgage in their individual names having a principal balance that will allow them to refinance the existing loan, or if the buyout payment is also going to be made from the refinance proceeds, can they afford a new loan that includes the additional principal balance needed to make the payment? Are there other marital assets that they can use to reduce or eliminate the required buyout?
(5) If the answer to (4) is no, then does the party have a “white knight”, a family member or other co-signer, who will help them qualify for a new mortgage, or who may be willing to assist in paying the amount that is needed to fund the buyout amount?
(6) Does the party keeping the property have a post-divorce budget that will allow them to maintain the carrying costs of the Family Residence? Or have they decided they can’t afford it and intend to keep the home anyway?
(7) Has the party keeping the residence considered other options for the future that do not include living in the Family Residence post-divorce?
(8) Is the party keeping the residence making the decision based on too much heart and not enough mind? Are they making an emotional decision that they will regret later when the practical realities of owning the Family Residence suggest another decision may have been better?
(9) Is this party ready to make this important decision now or should they perhaps wait until they are either emotionally more stable, or they have gathered additional information regarding their finances and other options for dividing the marital property?
(10) Will this party be better off selling the property, or have they at least considered whether this is the case?
The answers to these questions may lead to other questions. For example, if the party expects to receive child and spousal support and is not certain how much support they will be receiving, they will need to know at least a reasonable range of expected support, if they do not yet have a final agreement on support before they will be able to determine whether they can qualify for the refinance or if they will have the post-divorce budget to afford staying in the home.
Or suppose the party realizes they do not currently have the ability to keep the home, but they are confident that they will be able to afford it in the not too distant future because they anticipate they will have secured full time employment or they will have completed the necessary job training that will provide them with the income from a new career that will provide the ability to afford the monthly mortgage payments within the next two or three years. They can then pose additional questions to their spouse. They may want to ask their spouse if they would be willing to agree to a two or three year delay before requiring the other spouse complete the refinance and/or pay the equalization payment that they are due.
These ten questions may raise issues that the parties did not anticipate or consider when they initially decided they wanted to stay in the home. The mediator must not allow the party to make his or her decision regarding this important asset prematurely without engaging in a thoughtful decision-making process.
The party who wants to stay in the home may have come to the mediation aware that they have to “buyout” their spouse’s interest in the property, but they didn’t anticipate that they will also need to obtain a new loan and refinance the property in their own name. Sometimes, as soon as the mediator poses these important questions, the party immediately realizes that keeping the Family Residence is not a viable option.
The parties will not be satisfied with the mediation if they have been arguing over who will keep the house and buy the other party out of the Family Residence when neither one of them can qualify for a new loan, or if the answers to these questions will change the party’s mind regarding their decision to negotiate a divorce settlement that allows them to stay in the home. Best practices require that these questions be asked as early as possible in the mediation process.