Divorce, Today's Real Estate Market and the Ubiquitous Short Sale

In the not too distant past, most people who were going through a divorce and owned real estate could count on receiving proceeds for their interest in that real estate -- either through the sale of the property or through a buy-out from their soon to be ex-spouse.  That asset would help them to move out, pay for legal representation, provide a down payment on a new home and generally enable someone to move on with their life.  And, although a divorce is one of the most traumatic of life events, having a financial cushion made the process measurably better.

Now, unless that property was purchased several years ago and the last refinance was also several years ago, more likely than not, that real estate will not yield any proceeds.  It will yield debt (unless sold in a short sale, which I will discuss below).  Given this reality, some people are deciding that even though they will divorce, they will continue to co-own their real estate and hope that it will once again appreciate to the point where they are able to sell and, if not make a profit, at least break even.  Sounds reasonable?  It may be an option that works for some rare couples, but what it means is an ongoing (now business) relationship between people who you have seen fit to divorce one another.  It means that when the property needs repair, they have to decide who pays for what and how much.  It means that the owner not living in the house will worry about whether it is being maintained properly, and the owner that does live in the house, will resent the other owner's intrusive inquiries and inspections.   It means that they have to agree on who will pay the mortgage, taxes and insurance ("PITI").  And, if there is no written agreement covering these issues, it means that years from now, the ex-spouses may have disputes over when to sell, how to divide the sales proceeds and which real estate agent to use.  They may wind up in what is known as a partition suit in which one party asks for a court order requiring the house to be sold and for an accounting to make the other owner party pay his or her share of PITI (going back for years) while the other party asks for his or her share of the rental value of the property (after years of making no such claim).  In short, a partition suit is about as expensive and painful as a divorce and is to be avoided at all costs.  Although I have seen parties co-own property for years following a divorce, it is generally not a good idea.  Furthermore, if post-divorce co-ownership of real estate is going to work, there absolutely must be a comprehensive written agreement dealing with every contingency concerning the property.

Therefore, unless divorcing parties decide to go into the real estate investment business with their ex-spouse, if the property is "under water," they will want to pursue what is known as a short sale.  I would venture to guess that two to three years ago most people, even real estate agents, were unfamiliar with the concept of a short sale.  (The phrase "short sale" still does not appear in The Merriam Webster online dictionary).  A short sale is one in which the property is sold for less that the amount of the loans against the property.  As part of the short sale, the mortgage company, or companies, if there are more than one, approves the sale and forgives the deficiency.  So the sellers are able to conclude the transaction without continuing to be in debt to the mortgage company.  The first step to this type of transaction is to find a real estate agent who has assisted others in successfully obtaining a short sale.  Often that agent will inform sellers that the loan company will not consider a short sale unless the mortgage payments are already delinquent.  Whether this is true is dependent on the loan company involved and therefore sellers should try to identify not only an agent who has sold short sale properties, but one who has negotiated with their mortgage company.  The next step is to have an attorney review all documents before you sign them (this includes the agent's listing agreement).  After that you must find a buyer.  Then the offer is taken to the mortgage company, which will then decide whether to accept the short sale.  You should also consult your accountant or tax attorney for the tax implications of a short sale, as debt forgiveness may result in taxable income.

Pursuing a short sale can add to the stress of a divorce, and many people are tempted to walk away and let the bank foreclose in order to finalize their divorce sooner.  But the negative implications of such a decision can reach far into the future.  Even in this market, with a short sale, there is hope for divorcing couples dealing with real estate that has no equity.