Yesterday, the Minneapolis Star Tribune published part one on a series outlining the deteriorating housing market in the Twin Cities. Written by Chris Serres, Jim Buchta and Glenn Howatt, Minnesota’s New Ghost Towns offers a surprising and depressing look at the current status of suburban real estate in Minnesota.
We have seen a drastic shift in thinking over the last five years in terms of real estate and its sale during a divorce. Not long ago the concept of a short sale or foreclosure was rarely discussed (perhaps once in 300 divorces). In today’s market, however, we frequently discuss with potential clients their options when their mortgage exceeds the market value of their property.
For most parties, dividing assets is the easier part of the equation. People are often eager to receive something of value. More and more, however, we are handling disputes that involve nothing but an allocation of debt. Many seem not to have the incentive to step up to the plate and take on their equitable responsibility under the law – leaving the other to incur more debt, in the form of attorney’s fees, just to make things happen.
In the past two months, I have probably spoken with two dozen couples going through a divorce about the sad reality of their housing situation. The most common scenario involves a couple who purchased a house within the last two years, when the market was at its peak, and put little down on the property. They bought as much house as they could afford on their combined incomes. Now, however, the couple will split and cut their pool of resources in half.
In the old days (all of two years ago), this did not present a problem. The parties could list the home for sale and, within about a month or two, walk away with equity to divide. Today they face the prospect of losing $40,000 or $50,000 in conjunction with the sale. Both must come up with a large sum of cash just to get out. Ironically, this is the same couple who just a couple years back had very little money to put down on the property in the first place. What are they to do?
The first option we discuss involves protecting the credit rating of each and minimizing loss on the home. It is becoming more common for parties to agree to remain business partners, in a sense. One will remain in the home and pay the mortgage for a number of years, with some assistance from the other. Then, the parties will sell the home once the market picks up. The problem with this solution is that markets are speculative. The old rule that real estate never loses value has turned to dust and many experts don’t think we’ve seen the worst of this yet.
The second option we discuss involves a short sale. Parties can, usually without affecting their credit rating, negotiate with their lender and avoid having to come up with money at closing. Basically, the lender cuts a deal and allows the homeowners to satisfy their mortgage with sale proceeds that total less. You agree to pay 90% of the loan and the bank doesn’t have to mess with selling (another) house through foreclosure.
The third option that is discussed involves a foreclosure. If there is any light it is the fact that parties can allow the home to go into foreclosure and remain in the home for a period of six months until the statutory redemption period expires. The parties can pocket the money they would pay to the lender and walk away with cash. If their out-of-control ARM is $2,000 per month, they walk away with $12,000. Sounds good, but they probably won’t own another home for quite a long time, given the tremendous burden this will place on their credit rating.
Finally, another option involves both parties leaving the property and renting it to a third person. Neither ever thought they would become a landlord, but the solution often allows the parties to buy some time with the hope of the market picking up.