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In Divorce, the house is a risky asset.
When you purchased your house, by the time you got to the closing table, you had a large stack of documents and numerous consultations that informed you about what you were buying.
If you had a good realtor, they were your first line of defense. A good realtor looks for things that might affect the future marketability of the house like power lines, a busy street or a bad layout. Once you went under contract, a home inspector provided you with a detailed report about the condition of the house. You may have also received radon, termite, well, septic and stucco reports.
The bank that you used for financing obtained an appraisal to make sure you weren’t overpaying for the house and a title report to insure there were no other liens on the property. Your insurance agent may have even done their own inspection.
In divorce, however, almost none of these things happen. The custom in divorce when determining home equity is to obtain an appraisal and mortgage balance statement. But simply subtracting the mortgage balance from the appraised value is an incomplete picture of home equity.
‘Joan’ was happy and pleasantly surprised to retain the house in her divorce settlement. But before things were finalized, she obtained a home inspection only to find there was a very small crack in the brick mortar that ran from one side of the fireplace to the other. With confirmation from a structural engineer, she learned that the chimney had been slowly pulling away from the house over the 20 plus years they lived there. It had happened so slowly, the small crack went unnoticed, but the $35,000 to $40,000 estimate to fix this didn’t.
‘Steve’ agreed to keep the house and his soon to be ex wife kept her pension. They executed a quit claim deed as part of the divorce settlement and ‘Steve’ had 90 days post decree to refinance. Since he had great credit and income, he never anticipated any issues with refinancing but the bank did something nobody else thought to do before they signed a settlement agreement. The bank obtained a title report and discovered a state tax lien from his ex wife that wiped out his equity in the house.
Costly house issues that will eat up your equity are often things you don’t see as a homeowner living in the house. To get the most complete picture of the house as an asset, if you’re keeping the house, you need to look at the house as if your purchasing it a second time. Do the due diligence necessary to know what you owe, what you own, what you’re getting into, what you’re getting out of and what you’re getting stuck with.