“I want to keep my house.”
If this is the first thing a client says to me, an alarm bell sounds and the refrain of “Warning, Warning, Warning!” repeats itself in my head. Why? Because, as a CPA and CFP® working exclusively in the financial aspects of divorce, experience tells me that staying in the family home is often not the best path to financial security after a divorce. I call this stay or sell house decision – the House Factor. To make a good decision, you need to anticipate the consequences.
Delving deeper, I ask, “Why do you want to keep the family home?”
The most common answers I get are:
- I couldn’t afford to buy my house in today’s market – it has appreciated significantly in value
- This is my Dream Home – it is everything I have ever wanted in a house
- I don’t want to move my children – it would be too disruptive
Valid reasons for wanting to keep the family home, but let’s explore some possible unanticipated consequences.
“I couldn’t afford to buy my house today”
The logic here is that the house is a good buy. The original purchase price was less than what it would bring in today’s market. The problem with this logic is that in a Texas divorce, assets are valued at Fair Market Value (FMV). Simply put, you are buying the family home from your spouse at the value the house would sell for in the open market.
If you can’t afford to buy the house outright in today’s market, you probably can’t afford to keep the family home.
“It is my Dream Home”
The house is everything you have ever wanted or dreamed of in a home. It is decorated perfectly. It is great for entertaining. It even has a pool or that great backyard.
But, can you afford it? The problem with a Dream House is that it can quickly turn into a nightmare, if the costs of living in and maintaining the house drain your resources. It is one thing to get the house. It is another thing to afford staying in it. The worst case scenario would be to keep a house and quickly use all of your cash savings to pay for high utilities, repairs and property taxes. Ultimately, you could find yourself forced into selling the house and moving. By contrast, wouldn’t it be better to sell the family home in conjunction with the divorce and reinvest the proceeds in an affordable property? This strategy might enable you to more easily maintain an emergency fund and save for retirement.
When deciding whether to stay in the family home, it is critical to review the costs of owning it. These include:
- Can you afford the mortgage?
- Can you qualify for refinancing to remove your ex-spouse?
- Property taxes
- Home insurance
- Repairs and maintenance –
- Will the house need a new roof or air conditioning soon?
- Does the house have deferred maintenance?
- Homeowners Association Fees
- Yard, cleaning and pool services
- Pest control, etc.
My budgeting rule of thumb is cash inflow should exceed cash outflow. The bigger the house, the more expensive it is to maintain.
“Moving my children would be too disruptive”
Divorce is disruptive to children, even without moving. However, moving doesn’t have to mean a change of school or neighborhood. A move within the school district into a house suited to the new family dynamics may be perfect. Many of my clients say that their children were enthusiastic about house hunting and moving into a new home. A move is a new beginning-with new rooms to decorate and new memories to be made.
The Winning House Factor- Select a home you can afford which is consistent with your financial goals.
About Karen H. King, CPA, CDFA®, CFP®
Karen H. King’s Houston based practice focuses exclusively on financial aspects of divorce and family law. Karen has more than 30 years of experience in accounting, tax and financial planning. She can be reached at 713-349-0711 or at her website at www.HoustonDivorceCPA.com.