The Family Law Leader

Division of Real Estate in a Michigan Divorce

Real estate, and in particular the marital home, is often the most valuable asset a couple owns. During the real estate crash beginning in the late 2000s, ownership of real estate presented a significant obstacle to settling many divorces, as people found themselves owing more on their mortgages than their homes were worth. This often made it difficult to divide the mortgage debt and sometimes necessitated couples owning real estate together or living together in the marital home for months or even years after the divorce.

Marital Home Worth and Appraisal

While real estate values in many parts of Michigan have recovered some, the market remains unpredictable. People still have differing and sometimes unrealistic perceptions of what their homes are worth. For this reason, it is imperative that you hire a licensed real estate appraiser in the early stages of your divorce to help you develop realistic expectations of what will happen with your home and any other real estate you own in the final settlement. Many people ask me if a free market analysis, offered by some realtors, will suffice. While it may provide general information on potential asking price, do not rely solely on a market analysis as evidence of value. These opinions vary greatly from broker to broker and are of limited evidentiary value if your case goes to trial. Only a licensed appraiser is qualified to testify on the issue of value. I have seen appraisals deviate as much as 40{0ae2f2458dfc0a6eba9ebc1dc1357bcd8b472aaec96d10fb6b314c622e4228da} from a market analysis.

Divorce, Your Mortgage, and "Hold Harmless" Arrangements

If you have a mortgage on your home, you must arm yourself with a realistic idea of what your net equity is before you begin to negotiate a settlement. It is also a good idea to explore whether you or your spouse will be able to refinance the mortgage in one of your names alone if either of you decides to keep the house.

Occasionally, if the party who wants to keep the home is creditworthy, a lender will simply grant a release from the mortgage debt to the spouse who is not keeping the home. More often than not, though, the lender will require the party retaining ownership to refinance the home in his or her sole name. If this party determines he will need to buy out his spouse's entire interest and finance this, he would need to independently qualify for a new mortgage in an amount sufficient to do so. Sometimes people cannot qualify for a new mortgage on their own credit following divorce. For example, if husband and wife were both employed, with wife earning as much as or more than husband, in that instance, husband might not be able to refinance the house based on his income alone. This can present practical difficulties when trying to settle a case like this.

What is a "Hold Harmless" Arrangement?

An alternative to new mortgage financing is known as the “hold harmless” arrangement. It is often used when divorcing couples have little equity in a home, or if the spouse retaining the home simply cannot qualify to refinance the mortgage. Under this arrangement, the judgment provides that the parties remain jointly on the mortgage, with the party keeping the home promising to pay it on a timely basis and assuming all liability for the debt. There may be a delay built into the arrangement whereby the buyout occurs at the time of refinancing.

A word of warning, though: If the party keeping the house does not make the mortgage payments, it will affect the credit of the other ex-spouse, and if there is a foreclosure, the asset may be lost entirely. And, just to be clear, the mortgage company will continue to hold both parties liable for any deficiency (shortfall between what is owed and the value of the property) and does not care what the judgment of divorce says. For this reason, it is important that if you decide to incorporate a “hold harmless” in your judgment of divorce, we can explore other mechanisms for enforcement if your ex does not make the mortgage payments. At a minimum, there should be a deadline of at most a couple of years by which the spouse owning the home must either refinance or sell it. The judgment should also provide that the court retains continuing jurisdiction to resolve any disputes over the mortgage, including an award of attorney fees to the non-offending party if going to court is required. And remember, if your judgment of divorce incorporates a “hold harmless,” the spouse who is walking away from the home will still be jointly liable on the mortgage, which impacts her credit rating and debt to income ratio until the mortgage is refinanced. So if you or your soon-to-be ex are planning on buying a new home soon after the divorce, the “hold harmless” simply may not work for you.

Other Ways to Handle Division — or Shared Responsibility for — Your Home

There are many creative ways to handle division of real property, especially if there is substantial equity. If, for example, the home is paid for and the spouse keeping the home does not want to take out a new mortgage to buy out the other spouse’s equity, she could equalize this through giving him a greater share of other assets, such as retirement accounts. Sometimes when divorcing couples have minor children they choose to keep the house in joint ownership until the children have grown, and the judgment of divorce incorporates a formula for division of the proceeds of sale in the future. Of course, this type of arrangement carries some risk, since no one can predict what the real estate market will do. It also requires that the cost of carrying the marital home be allocated on an equitable basis. With a little creativity, joint ownership can work. However I recommend it only for those couples who have an unusually amicable relationship after the divorce.

If I handle your divorce, we will explore all of the scenarios for division of real property. The sooner you obtain an appraisal, the better position you will be in to assess your options.

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