How to buy your (soon-to-be) ex-spouse out of your apartment
By Lucy Cohen Blatter |July 31, 2017 - 1:59PM
It's perhaps no surprise that for divorcing New Yorkers, who gets the apartment—and how—is among the biggest sources of contention. That's because not only is a home probably the most valuable asset a couple owns together, it's also riddled with memories and emotions.
So, what to do if you want to buy your (soon-to-be-ex) spouse out of your apartment and keep it for yourself? We checked in with experts for advice on keeping things clean, simple and fair.
First, make sure you actually want to stay in the apartment or house.
"Generally, my take on this issue is to recommend that someone be absolutely certain that they are able to carry the costs comfortably moving forward, and that they really want to," says Elise Pettus, founder of UNtied, an online divorce resource. Those costs she's referring to include monthly maintenance and mortgage. "In my experience, a lot of women tend to cling to this idea that they have to stay in the apartment or house 'for the kids!' But in fact, moving can be easier for the kids than they think, and it will them significantly more financial freedom, plus it may help them emotionally to leave the marital home (and its memories) behind and start fresh," she says.
Other experts agree. "In general the cleanest solution is to sell the apartment and split the profit. Then everyone’s equal," says Sara Stanich a Certified Divorce Financial Analyst (CDFA) withStanich Group.
Now, even if selling right away isn't in the cards, a buyout isn't your only option, either," says Avani Ramnani, a CDFA at Francis Financial. "Sometimes a couple will agree (in writing) that one of them will stay in the apartment until a certain time, "say, when the youngest child goes to college." At that point, says Ramnani, they'll usually sell the home and split the money then. "I've seen many cases work that way."
To find out which way is best for you, of course, "it makes sense to sit down with a financial planner or advisor and hammer out some numbers," says Pettus. In particular, look for a Certified Divorce Financial Analyst (CDFA), who have had the education, ethical standards to uphold, and experience in dealing with divorce. Your typical CFA or, even accountant, doesn't have that training. "The more complicated your case, the more you can benefit from a CDFA," says Stanich.
Now, assuming you want to go the buyout route, here are several things to keep in mind:
Step 1: Determine the value of your home.
The first thing you need to do is figure out how much your apartment is worth (so you can figure out how much you'll be paying your soon-to-be ex). Stanich suggests hiring an appraiser for a few hundred dollars to find out the value. Some people, she says, go back to their brokers and ask, but you have to keep in mind that brokers have some skin in the game (it might be in their best interest for you to try and sell, for example). An appraiser, on the other hand, is an unbiased expert.
"In the vast majority of the cases, we're hired by both parties, because we're neutral," says Jonathan Miller of the appraisal firm Miller Samuel. If things go awry during negotiations, appraisers can be called in to testify in court (whereas brokers cannot), which is something Miller has done many times.
Step 2: Evaluate a source of funds for your buyout.
In most instances, the buying spouse will refinance their loan, say experts. (It makes sense, since the spouse who is no longer living there won't want their name to be associated with any potential defaults.)
Sometimes, the buying spouse takes out a big enough loan to pay off the previous loan and pay the selling spouse what’s owed for the buyout; that's called a "cash out" refinancing. Let's say you and your spouse have $500,000 in equity on a home, and a mortgage with a balance of $500,000, you need to pay your spouse $250,000, so you'll refinance for $750,000, $250,000 of which is given to you as a check at closing which you can hand out to your spouse. "The $250,000 paid to the spouse is half of the equity in the house," explains Ramnani. "The remaining $500,000 that the owner spouse is getting from the mortgage will go toward paying off the previous mortgage. So, the owner spouse doesn’t keep any cash from the refinancing. They have essentially “cashed out” half the equity in the form of a loan and paid the ex-spouse."
For a bank to approve this kind of transaction, though, you'll have to have to have strong financials on your own. That said, "qualifying for a cash-out refinancing is no different than qualifying for a standard mortgage or a refinance," says Robbie Gendels of National Cooperative Bank (fyi, a Brick sponsor), and it's something she sees often in New York, a city where many couples have strong double incomes. "You just have to qualify as if you were purchasing the apartment by yourself."
Oftentimes, a buyout involves trading assets, says Stanich. Maybe one person keeps more of the money in a joint acount, or the person staying in the apartment cashes out their retirement savings to pay what they owe. Sometimes, says Ramnani, people put a second home into play. There are several different ways to do it. "It's all a matter of negotiation," she says.
Step 3: Figure out the tax implications.
When deciding how much to pay your moving-out spouse, you need to keep in mind how much you're going to pay in capital gains tax when you do sell your home in the future. "Sometimes that's part of the settlement," says Stanich.
And, she says, if you're using your retirement or even cashing out stocks to trade for equity in your home, you need to look at the tax impact of that. "It can be major," says Stanich.
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