Deferred Buy-Outs in Divorce

Real property buyouts in divorce cases are more difficult now with interest rates so high.  Because it is simply not feasible for many divorcing homeowners to qualify for a buyout mortgage, the trend of deferring the sale is increasing — with more divorced parties remaining on a joint mortgage and holding title with an ex. 

The reality is that while it may be better for the family, and especially the children, to remain in the family home for some time after the divorce, the liability of remaining on joint title and on the mortgage poses significant risks to the divorced couple. 

While it is impossible to predict all the scenarios that can come up, here is a sampling of some of the more common issues we see as CDREs:

Joint Title

• Liens or Judgments: Titled owners are at risk of creditors encumbering real property. Consider that one of the former spouse’s debts could force a sale or substantially decrease the equity.

• Bankruptcy: If either party files for bankruptcy and includes the real property, it could interfere with the salability or the ability to refinance.

• Liability: While on title, your client may be sued for injuries and damages associated with the property.

• Encumbering the Property: Either legal owner could use the property as collateral — this can be for anything from gambling debts to SBA loans.

• Leases: Should the property be leased, tenant rights could apply. If the property is to be sold on a certain date but it’s been leased (or roommates have moved in), the sale could be in jeopardy.

• Incapacitation: If a titled homeowner becomes incapacitated, disposing of the asset becomes more complex and the process longer.

• Death: If the parties hold the property as co-tenants following their divorce, a decedent's share will pass to the heirs, thereby establishing ownership between them and the surviving party.  Or the decedent's share may need to be probated, leading to further expenses and delays. In the event of remarriage by either spouse, the surviving party could become a co-tenant with their ex’s new spouse! 

Joint Mortgage

Perhaps the most common risk of deferring the sale is remaining on a joint mortgage. 

• Credit: Any default, such as mortgage late by 30+ days, a loan modification, or foreclosure activity, will cause the credit of all parties on the mortgage to be adversely affected. It is a tough day for an out-spouse who is in the midst of buying a house to learn that their loan has been denied because their ex missed a house payment.

• Deficiency judgments: Should the property foreclose, depending on the loan structure and statutes

 governing deficiency recovery, this could haunt an uninformed ex-spouse. 

When your clients wish to defer the sale of the home, consider disclosing and protecting them against the risks of doing so. They should not turn a blind eye to the mortgage if they are still on it and payments are in the hands of the other party. Urge them to stay in touch with the mortgage company on a regular basis to ensure payments are made on time, and to also check their credit report regularly . 

Lastly, when we are called in to list a property post-judgment, we sometimes see vague terms that either are not specific or omit when a buyout or a sale should take place, how the listing agent is chosen, who is responsible for the property should it become vacant (including mortgage payments, upkeep, and utilities), and how proceeds are divided. This can leave the door open to costly issues and delays.

If you or your clients have any other questions regarding their property or would like more information, please do not hesitate to contact me or pass my number along to them!