This is a reprisal of a blog post I wrote two years ago about real estate valuation and division in a Texas divorce. The points here still ring true today. Hat tip to Jeff Landers’ (@bedrock_divorce) Personal Finance Column on Forbes.com for his article about real estate in divorce. He had seven points that he believes divorcing women need to know about real estate and real estate appraisals. I actually think that his point is relevant whether you are a man or a woman – anyone going through divorce that has real estate needs to be aware of how real estate is handled, especially in Texas since the rules in Texas are a little different than most other states.
In Texas any asset purchased during the marriage is considered community property and is divisible in the final divorce. (Any property purchased before marriage or received through gift or inheritance is separate property. For a discussion on Texas characterization and division in divorce, click How to Divide Marital Property in a Dallas, Texas Divorce.) In reaching a fair division of the marital estate, first the values of the assets must be determines. For real estate, it is always best to get an appraiser to give an opinion of value under the current market conditions.
Landers’ points are:
- Most real estate appraisals are based on comparable sales.
A real estate appraiser evaluates a property based on the recent sales of comparable properties in the area, considering whether the features of the real estate in question make it more valuable or less valuable than the other properties considered. Some people try to use the tax appraisal value in divorce, but that value may or may not be related to the actual fair market value of a house.
- Unique features may be evaluated differently by different appraisers.
How the unique features of a property are valued is a subjective standard that can differ from one appraiser to another. Appraisers won’t consider the extravagant window treatments or fancy paint on the walls. Features that effect value include a swimming pool or a 4-car garage. If one side of the divorce gets an appraisal and the other side disagrees, then a second appraiser can be hired. If there is a substantial difference in the two opinions, then a third appraiser can be appointed by a judge to “break the tie”.
- One woman’s peaceful Zen garden may be another woman’s backyard eyesore.
Like appraisers view things differently, so may buyers. The seller may be really into fruit trees and think the orchard is of great value to the property. A buyer, on the other hand, may find the falling rotting fruit to be an annoyance that attracts critters to the yard. So, a seller’s viewpoint of the value of costly improvements they performed on the house may not be indicative of the value that an appraiser or a buyer may find.
- Make sure you use an appraiser who’s knowledgeable in the local market.
Realtors like to say, “all real estate is local” – that holds true in valuing real estate in a divorce. The local market conditions drive the prices of real estate. An appraiser in Dallas may not be familiar with the under currents of the housing market in Houston to give a fair assessment of value.
- Real estate values change over time.
Over the past few years we have seen with great emphasis how the real estate market can change over time. Economic factors – like the availability of mortgages, how high or low mortgage interest rates are, or whether the job market is shrinking or growing – affect housing prices. Just because a house was worth something when it was purchased does not necessarily carry over to the present value. Likewise, some cases need to have a historical value to show what the property was worth in the past.
- Fair market value is only part of the story.
In considering a division of property in a divorce in Texas , finding the fair market value of the property only provides part of the information needed. The mortgage balance is also important to know, which then provides the equity position in the property.
- Equity in the property is not the same as money in the bank.
Obviously, you can’t spend home equity at the grocery store or use it to pay the electric bill. So, different spouses may have different priorities in achieving a fair division of property. One spouse may have more interest in spendable cash; where another spouse may be more interested in the long-term equity of the real property. But, even if the house gets sold for more than was paid on it, there are tax considerations to take into account. If the house appreciated in value since it was purchased, there may be capital gains taxes to pay. This will decrease the cash available to spend.