To keep or not to keep, that is the question… Conventional wisdom and most attorneys, would have you keep the house if you are getting divorced. You retain continuity for the kids; you love the house and you and your Ex put so much into it and not just equity; you have to live somewhere and the house payment is cheaper than many rents and besides, homes will go up in value eventually and you can hold out until then and reap the benefits. All true statements, but the bottom line is that I believe you are still better off selling, especially if you are not the bread winner of the family. Plainly said, in sickness and in health and ‘til death do us part, applies to the home as it does the marriage; dissolve one, dissolve them both.
I have seen this time and time again where the wife keeps the house and the husband walks away usually forgoing the equity in exchange for keeping the 401K or some cash equivalent to half the equity. It seems like a good deal to Mrs. Homeowner; the kids stay in their bedrooms and that’s important for them to get through this terrible ordeal and life stays pretty normal for everyone. Poppycock! As emotional as divorce is, your financial security for the future is more so. Nothing will stress out kids more than a parent who is forced to go back to work or take on additional hours because they have to make the house payment. This is as true for the small condo as it is for the multimillion dollar estate. Don’t keep the home, it’s just a money pit.
A home a money pit? Am I not an advocate of homeownership? Isn’t owning a home the best in investment one can make? Yes and yes but let’s face it, once husband or bread winner is out of the daily picture, you have all the responsibilities of maintenance that your spouse used to take care of; cutting the lawn, painting, carpet replacement etc. not to mention the mortgage and what if, at some point, there is a major repair required? Now I’m not suggesting that after you get divorced, you shouldn’t eventually buy a home. In fact sometime after, maybe a year, it’s a great time to consider purchasing because by then you’ll have a sense about what it’s like to be on your own and you’ll have a better idea about your budget and what you really can afford. But immediately following divorce, the tendency is to continue unchanged in your habits, when in fact you should be doing the opposite and cut expenses. It’s amazing how quickly you realize just how much 50% less really is, and until the divorce is final, it’s often very difficult to know this.
Why is it bad if you were to keep the house? There are a couple of reasons. We know for example, cash is king. We’ve seen this lesson applied to housing ever since the market started its long descent and in businesses across every genre, so why would “keep the house” be better than “cash is king?” It isn’t. Get the cash and then decide what’s best. If you end up having to sell, your real estate agent commissions and closing costs will average about 6 – 7% of the homes selling price. This is true whether that is a year after your divorce is final or ten and is never accounted for in the settlement. So should you be compelled for whatever reason to sell, someday those costs will be paid solely by you. If you are selling a $400,000 home for example, 7% is $28,000; did your Ex give you an extra $14K in the settlement to account for his half of this eventuality? Unlikely. What if the home sells for $1M? 7% is $70K and that’s $35,000 extra cost to you… not exactly small potatos.
Another issue is the illiquidity of real estate. Let’s face it; you can’t just take money out of the home like an ATM. If you end up needing cash and you’ve taken the home instead of cash, you’re stuck. By selling together, not only are the selling costs split equally, but any difference between what you thought your home was worth and what it actually sells for, is shared as well. Moreover, if you want or need the cash right now, you are more likely to accept a price lower than you might have otherwise and those proceeds of the sale are split equally between you and your Ex. Thus, if you sell for a little less, the Ex does too.
“But home prices are rising and if I get the home today, won’t I gain in the appreciation?” In that scenario yes, but that appreciation still has to be greater than the 7% selling costs and if you sold and took half the cash, you could still buy another place, perhaps at a lower price point for example, and that too would appreciate. Of course if prices dip, you bear the sole brunt of that drop as your Ex is not only divorced from you, but also from the asset. The key here is that you want the flexibility to make financial decisions and keeping the home as part of the settlement no matter how you slice it, is not the flexible way.