Real Estate Nuggets & Tidbits (Family Law)

As this year winds down, we remain in the thick of a turbulent real estate market. Just as many questions and uncertainty abound as there were same time last year. We are still standing, and we have survived - but the work goes on.

In my Divorce Real Estate practice, I have seen several trends lately that have me quite concerned:

Throwing the House out with the Bathwater: It's no secret that all too often, the struggles and overwhelming impact of divorce diminishes the parties' ability to make sound decisions. A common decision with the upside-down, albatross of a house is to let it foreclose. Credit's ruined anyway, and who has the time or energy to deal with selling it….especially when there's nothing to get out of it?

Here's the reality check: One day, our clients will want to begin their lives anew. Once the pain and upheaval have faded, they will want to plant new roots - and that usually involves buying a new home. After a foreclosure, according to today's lending guidelines, they cannot purchase again for 5-7 years. After a short sale, it is 2 years. Encourage them to muster up the stamina to short sell, rather than to foreclose – they’ll thank you later.

Further, a foreclosure has tax consequences. It can also have deficiency consequences, and is not an end-all solution to the problem. From a credit/purchase standpoint, foreclosing rather than short selling will make the road to recovery much longer.

Still Married to the Mortgage: A common strategy in divorce is for one party keep the house; the "out" spouse quit claims off of title and both parties remain on the mortgage note. This has trouble written all over it. Giving up ownership rights to an asset, yet remaining financially responsible for it is a dumb thing to do.

What happens when the "in" spouse starts missing payments and the "out" spouse's credit is affected? What happens when the "out" spouse applies for a new mortgage and can't qualify because they already have a mortgage? What happens when the "in" spouse needs to short sell a few years later and the "out" spouse won't cooperate? If the “out” spouse remains on title, then what happens if he develops a gambling problem and the house is liened? Or either one gets a tax lien? What happens if he files bankruptcy? These are just some of the scenarios that come to mind.

I had a call not too long ago from a woman in Wyoming, of all places. She and her boyfriend wanted to buy a house together, but they could not qualify because he was still tied to the mortgage note from his former marital residence. His ex was awarded the house and he quit claimed off title. He is not a rightful owner, and can't make his ex-wife (who was awarded the house in the divorce) sell. She does not qualify to refinance. He's stuck. Last I heard, he was going to take his ex-wife to court in an effort to force her to sell. What a mess – and it could have been avoided if the parties divorced the mortgage along with each other.

Remaining on a joint mortgage means remaining financially married. Therefore the decision not to sever the joint mortgage should be weighed very carefully. I hope this provides some food for thought when dealing with the family residence. This market has complicated life in ways we never thought it would.