Real Estate - How to Value and How to Divide

One type of property that is often at issue in a divorce is real estate or the legal term “real property” which is land and/or structures that are owned. Examples of real estate are your primary residence/home, rental properties, vacation homes or cabins, farms, investment properties, timeshares, or a plot of land. Real estate often represents a significant portion of your net worth so it requires careful valuation and consideration when being addressed in divorce.

First: Gather the Facts

The first step in this analysis is to gather the facts to determine the amount of equity in the property.  Equity is the value of the property less all debt pledged against the property. For example, if your house is valued at $250,000 and you have a mortgage against the property for $150,000, then the equity is $100,000.

Landing on a value of real estate can be challenging. The value you are looking for in divorce is an “as is” or fair market value.  Essentially – what would a third party pay for the property in its current condition? The valuation likely accounts for location, size, condition, and any recent renovations.

If you plan to sell the house, you don’t necessarily have to land on a value ahead of time.  You can list the house and whatever it sells for is the fair market value and the equity is whatever remains after the selling fees and all loans are paid off.  For example, if your house is valued at $250,000 and you have a mortgage against the property for $150,000, but you sell it and pay 6% in selling fees, then the resulting sale proceeds or equity is $85,000.

Options to Value Real Estate

If you want to explore options where one of you keeps the house, then you need to land on a value. The easiest way to do that is for you and your spouse to agree on a value. You could start by looking at publicly available values, like tax assessments through the County (the one that is usually used for real estate tax determinations) or values on sites like Zillow, Redfin or Trulia. These are not always accurate, but they might provide enough information for you and your spouse to agree on a value.

If you and your spouse cannot agree on a value of the property on your own or with freely available information, as a next step, you could ask a realtor to do a Comparative Market Analysis (CMA) or have several realtors give an opinion to see if there is consensus. A CMA is a comprehensive assessment conducted by real estate professionals to determine the fair market value of a property. This analysis involves comparing the property to similar properties, known as comparables or "comps," that have recently sold or are currently on the market. By analyzing key factors such as location, size, condition, amenities, and recent sales prices of comparable properties, a CMA provides valuable insights into the potential selling price or market value of the subject property.  Realtors often provide a CMA for free in the hopes you will hire them for additional work. A CMA by a realtor typically entails a visit or walk through to look at the property and then a report where the property is compared to other similar recent sales to come up with a potential value or range. You should provide clear direction to the realtor that it should be an as is assessment as you want a realistic value, not an aspirational one if you were to sell.  It is often helpful to find agreement on a house value if you are both involved in the walk throughs and work together to choose a realtor.

If you cannot agree on a value with a realtor’s help, then you may need to conduct a fair market appraisal. An appraisal is a comprehensive evaluation performed by a certified appraiser to determine the fair market value of an asset, such as real estate, for the purpose of equitable distribution between spouses. This appraisal aims to provide an unbiased and accurate assessment of the value of assets, considering factors such as market conditions, property characteristics, recent sales data, and other relevant factors. Appraisers typically adhere to legal standards and guidelines established by state laws and court requirements for property division in divorce proceedings. They provide detailed reports documenting their findings and conclusions regarding the fair market value of the subject property, which can be used in divorce negotiations or court proceedings. You will pay for this appraisal and the cost is often shared between the parties.  In highly contested situations, a Court typically uses an appraisal like this to confirm a real estate value it the parties cannot agree.

A bank appraisal used for a refinance of a mortgage is different than a fair market (comprehensive value) appraisal in divorce. A bank appraisal is assessing the value of the property as collateral for a loan, while a comprehensive value appraisal is used to establish the fair market value for divorce negotiations.

Note that lenders typically will not accept the comprehensive appraisal for lending purposes, so you will incur an additional appraisal fee with this option if you also need a bank appraisal for lending purposes.  Be sure you understand how any appraisal is going to be used (for divorce valuation purposes, refinance purposes or both) before you incur those costs.

Outline All Liabilities or Debts Against the Property

Once you have a value for the property, the next step is to identify the loans or debts associated with the property.  This includes things like primary mortgages, second mortgages, home equity lines of credit (HELOCs), or home equity loans.  You should understand the outstanding balance on each of these loans and who’s name each loan is in. Make sure you understand the difference between a HELOC and home equity loan and note only the outstanding balances.  To fully understand the current financial picture, you want to know the outstanding balance of loans and not only the maximum credit available. You can find this information on recent statements or by logging into your account and printing a screenshot of a recent balance.  

Investment Properties or Income Generating Complications

One complication in valuing real estate is investment properties which generate rental income.  In these cases, the factual analysis might include assessing the financial viability and potential future returns as part of the value. This could involve analysis of rental agreements, evaluating market trends, and considering potential maintenance costs. The goal is to arrive at a comprehensive understanding of the income streams and future prospects associated with these properties, guiding decisions on whether to sell, retain, or distribute these assets. If you and your spouse cannot land on a value of investment properties on your own, you may need a special appraiser or business valuator. Farms may be particularly complicated because of unusual rental arrangements and income from farms often being shared between family members and/or being inherited. Farms also sometimes also provide substantial income and may blur into a cash flow analysis in a divorce. If you have substantial farmland as part of your divorce, you may want to consult with a lawyer or appraiser with farm expertise.

Like other types of real estate, once you have a value of the investment property, then you subtract any debt against the value, and you will have the equity.

With this information, you now have the factual basis for real estate decisions.

Second: Understand the Law

On the legal side, equity in real estate is typically considered a marital or joint asset, to be shared equitably or equally in a community property state, unless one party has a non-marital or separate ownership in some or all of the equity.  Laws vary on how non-marital/separate equity in real estate is determined and what obligations the party claiming this separate interest has to prove that benefit. Commonly real estate owned prior to marriage or that was bought during the marriage using one spouse’s money alone for a down-payment (like with inheritance or pre-marital funds) has a non-marital element.  If you want to make a claim that you have a right to more than an equitable share of the real estate, you likely have to provide clear documentation of your right to more than half. In community property states, the equity in real estate purchased during the marriage and titled jointly is typically shared equally. You should consult with an attorney if you need help calculating and/or proving a non-marital interest in real estate.

Once the equity is calculated and categorized, the next decision is determining whether the house will be sold or one spouse will buy the other out of the equity.  

Real Estate Division Examples

Here are some examples to illustrate potential divisions of real estate equity in divorce.  

First, see an example of selling or one spouse buying the other out of a $250,000 house with a $150,000 mortgage.

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House Sale with All Joint/Marital Equity

Buy Out with All Joint/Marital Equity

As shown above, with the house sale, each party ends up with $42,500.  When Spouse 1 buys out the home equity, Spouse 1 keeps the house with $100,000 in home equity and Spouse 2 will receive a $50,000 buy out.

Now let’s look at two similar examples where Spouse 1 has a non-marital/separate interest of $25,000 in the property.

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Spouse 1 Buy Out with Spouse 1 Non-Marital/Separate Equity

Above, Spouse 1 keeps the house with $100,000 in home equity and Spouse 2 will receive a $37,500 buy out to reflect Spouse 1 keeping a larger portion of the equity based upon Spouse 1’s non-marital/separate interest.

Below is a similar example but where Spouse 2 has a $25,000 non-marital/separate interest in the property.

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Spouse 1 Buy Out with Spouse 2 Non-Marital/Separate Equity

Above, Spouse 1 keeps the house with $100,000 in home equity and Spouse 2 will receive a $62,500 buy out to reflect Spouse 1 buying out a larger portion of the equity based upon Spouse 2’s non-marital/separate interest.

Different numbers would lead to different options, but these are common scenarios.

Logistics of Title on Property and House Loans (Mortgages)

When you are considering the legal implications of real estate in divorce, there are also two logistical issues that will need to be addressed.

First, title on the property itself is typically easy to transfer from one party to another.  Using a quit claim deed or other court order after a divorce, one party can be removed from title which relieves that party from any tax or other homeowner obligations moving forward. We help walk you through this process in the modules on post-divorce matters.

The other issue that can be more difficult is the titling on any mortgages or debts pledged against real property. You cannot remove someone’s name from a mortgage or transfer a debt from one party to another through the court in a divorce.  This typically needs to be done through the lending institution and may have costs associated with it.  There also may be issues with qualifying for a new mortgage alone if that needs to happen. If you are working together on resolutions, there may be creative options to avoid the expense and hassle of transferring or assuming a mortgage. Check out modules on post-divorce matters to learn more.

Emotional Considerations of Dividing Real Estate

When making decisions regarding your real estate, keep in mind that emotional elements may make a legal analysis about real estate in divorce challenging. While sentimental attachments to real estate are inherently subjective, acknowledging their existence is important.

For example, the family home, often a center of shared memories and experiences can carry substantial emotional weight. A spouse who spent years cultivating a garden or completing a remodel may feel overly tied to the house due to the physical work put into creating it. Sometimes one or both parents may feel that retaining the family home is essential for providing a stable environment for children.  Real estate can also be tied to a sense of financial security, and the prospect of parting with it may evoke fears of instability. Such concerns can influence decisions on whether to retain or sell real estate assets. And may also be connected to cash flow if only one party is going to start making the mortgage payments alone.

The emotional aspect of real estate in divorce can pave the way for creative solutions and compromises. For instance, rather than engaging in a protracted legal battle over a real estate, you might agree to unique arrangements such as co-ownership for a defined period, allowing one party to stay in the home until certain life events unfold, trading another asset, like retirement, for real estate, or delaying the payment of equity buy out to avoid immediate financial strain.

These types of creative resolutions can address what feels right to you while still finding a solution that works.