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This is the scenario:

Our house is worth about $250,000 (we think). We owe about $200,000, so we have $50,000 equity. We are divorcing amicably and both want a solution that is fair and makes sense.

Part of our settlement is that we'll split the proceeds from the sale of the house (and we assume I'll sell it within the next few years).

Option 1 (as described by my husband): "Get the house appraised or use a value we both agree on. Subtract what is still owed and divide that in half. Subtract $10,000 from my half to offset closing costs and and some maintenance and the resulting number would be what you "owe" me for the house if you were buying me out. We can subtract that amount from your half of the 401k. [FYI, we're also splitting the 401k.] We refinance into your name and you might be able to get a home equity line in addition to the mortgage to help finance any repairs going forward. You would then get all of the proceeds upon the sale of the house."

OR Option 2:

"Instead of the 401k offset, we can say that you pay me the buyout amount as calculated above upon the sale of the house. That amount would be reduced by the difference between the appraised amount and the sale price. So, we calculate it based on now, but there's a safety in case the value of the house goes down."

I think I understand the two scenarios, but I don't know whether either one is clearly a bad idea. Any help is greatly appreciated.

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3 Answers 3

up vote 5 down vote accepted

Both are close, but two notes - amiable or not, I'd rather have a deal that ends now, and nothing is hanging over my head to get or pay money on a future sale. 401(k) money is usually pre-tax, so releasing me from $10K of home equity is of more value than the $10K in a 401(k) that would net me $7K or so.

As I commented to Joe, I'd focus on valuation. If your house is similar to those in the neighborhood, you might easily value it. If unique, the valuation may be tough. I'd spend a bit on an appraiser or two.

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This is very helpful; thanks. I think an appraisal is probably wise. –  user17618 Jun 20 at 19:34

Both seem to be reasonable.

To decide you need to guess if the value of the house will go up or down between now and when you sell.

If you think the value will go up - reach a calculation agreement now.

If you think the value will go down - wait until the house is actually sold.

So ya pays yer money, and ya takes yer chances...

I think I understand the two scenarios

Unless you are absolutely confident that you understand both scenarios - make sure your lawyer gets involved and explains them to you until you do understand.

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I was expecting more advice on valuation. That would seem the toughest aspect of this issue. –  JoeTaxpayer Jun 20 at 18:36
    
@JoeTaxpayer - I agree that's the toughest part. I don't think either option is clearly a bad idea. But I have no valuation advice. Perhaps others could chime in with their guesses on future home valuations. –  Joe Strazzere Jun 20 at 18:51
    
Thanks, this was helpful too, though JoeTaxpayer's additional details helped a lot. –  user17618 Jun 20 at 19:41

How about a third approach:

Figure the buyout as above.

Figure what percentage of the value of the house the buyout constitutes.

When the house sells the other party gets that percentage of the sales price.

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This is worse for the OP. No? –  JoeTaxpayer Jun 20 at 18:34
    
Could you please elaborate on this? I'm not sure I understand. Do you mean the "other party" (my husband, or me?) gets that percentage of the difference between the estimated sale price and actual sale price? –  user17618 Jun 20 at 19:22
    
@user17618 I was saying "other" because I wasn't sure from the original who was keeping the house. –  Loren Pechtel Jun 20 at 20:25

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