162. Real Estate Decisions in Divorce: What You Need to Know Before Buying

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Welcome to WeChat Divorce, hosted by Karen Chellew, Legal Liaison and Catherine Shanahan, CDFA.

Each episode we sit down with divorce professionals and industry experts to provide insights and frank discussions about real people, real situations, and real divorce to help you achieve your best life post divorce.

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Hello everyone and welcome back to WeChat Divorce, where we break down the messy, emotional and often confusing parts of divorce and help you make smart, informed decisions every step of the way.

I’m Karen Shalu, legal liaison and Co founder of My Divorce Solution.

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And I’m Catherine Shanahan, divorce financial specialist, CDFA and Co founder of My Divorce, I should say the other Co founder of My Divorce solution.

We’re here to give you the clarity you need so that you can take control of your divorce, especially when it comes to your money and your future.

Today, Catherine, we’re going to be talking about what we’ve been seeing coming up more and more, especially in this very volatile real estate market.

1:21

Buying real estate during divorce, when to do it, how to protect yourself and why feeling protected isn’t the same as being protected.

Yeah, there are a lot of scenarios coming up when it relates to real estate now.

1:36

But let’s talk about the real life scenario where our client wanted to purchase that second home and he’s still in the middle of the process.

You know, he plans to use the money from his four O 1K or borrow money from his life insurance product.

And while he felt protected by a special clause his realtor added to the contract, the real story is a lot more complicated and the might not really be that that clause might not be really that protective.

2:03

Yes, absolutely.

So the scenario, this is how it lays out client is very near the end of his divorce.

He’s excited, it’s been long, challenging, frustrated and he wants to move on.

Who doesn’t, right.

2:19

So he found a home, a second home that he wanted to purchase and the realtor wrote up a contract for him and let him know that he put in a special clause just so that he’s extra protected.

2:38

So client sends me the sales agreement to review.

Not that we ever, ever give legal advice, but we do look at it from a financial lens and very specific to where they are in the divorce process so they can ask really good questions of their attorney and or other divorce professionals.

2:57

So the interesting thing that came up right away was that there was no mortgage contingency clause, but there was a small provision deep into the contract that said client wanted to use part of a retirement plan and or maybe a life insurance policy to purchase.

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And the contingency was that client would use this to purchase the home instead of a mortgage contingency as long as there was no substantial penalty.

So that would be his only out.

3:36

Say again.

That clause was if he needed to exit this agreement.

Right.

That was the contingency, yeah, I should explain that, Catherine, to your point, a contingency is a way out.

So it was if there was a substantial penalty, he could get out so he felt protected.

3:58

So I.

Wish I would have had a contingency in my last divorce, my last marriage.

Sorry I’m digressing, but now that you explained that, a way out, boy oh boy, don’t we all wish we had just a way out clause.

Yeah, and you know, it’s, it’s really common to want to move ahead.

4:19

And I, I did the same thing.

I didn’t want to rent, I wanted to buy a new home.

I had small kids and I didn’t I couldn’t stay in the marital home.

So I understand that emotion as a parent, but also as someone later in life who just wants to move on, especially after a 2 year divorce.

4:40

But in this specific situation, the problem was the the word penalty would could have come back and created a way for him not to get out of the contract.

4:56

Because Catherine, you can explain that better than I can.

That’s why I.

Right, because of.

The conversation.

Yeah, the clause read that he could get out of the agreement if there were substantial penalty for with for taking money out of his 401K or his life insurance product.

5:15

But there there would be no penalty.

You know, his life insurance product was a loan he was taking.

So yes, there would be a financial consideration or impact to him.

He’d be paying interest on the loan.

If he takes out too much it could be taxable, but that’s not considered a penalty.

5:32

That’s just the tax effect to it.

Then the same thing with the four O 1K.

He’s over 60 years old.

There’s no penalty for him to take money out of his four O 1K.

However, there’s a tax ramification.

But it wouldn’t be considered a penalty the way that this agreement was worded.

5:49

So he would really have no out if he decided that this was making his divorce more complicated.

He really was moving too fast.

Whoa, whoa, whoa.

Let me change my mind.

It’s really not the house I wanted or I really can’t afford it.

6:04

Whatever it could be.

You know, my my excited emotions got ahead of me.

He wouldn’t have been able to get out.

And it was a big purchase.

Yeah, for sure.

And he was under the assumption and we have specifically given him questions to ask his attorney about this so he can hear the answer.

6:24

We know the answer, but we can’t tell him the answer.

But we can certainly give good questions.

He is under the assumption that if a trust is created or an LLC is created that then this new property isn’t marital.

Interesting question.

6:40

And I’m pretty sure he’s going to hear just as another client earlier this week, I was on a call with her and her attorney for she wanted to do the same thing.

I just need to get out of the home.

I want to buy another home.

And you know, the attorney said look, it is marital.

6:57

The attorney told the client it is marital.

And so, you know, we can stipulate to these things, but your spouse isn’t going to stipulate, you know, he’s going to want any increased value if this divorce continues to go on.

And you’re just creating another complexity here that you really can anticipate.

7:16

And it’s making things more complicated.

And so the client in this situation could be up against that because they’re right on the heels of their final hearing.

You know, I believe we said, look, ask these questions, but really our gut tells us you’re a bit premature in making this decision.

7:35

Yeah.

And, you know, you bring up at a point it adds more complexity.

You know, I talk about this a lot, even when you’re starting the process.

And a lot of people like to just immediately go start dating, and they like to put it all over Facebook, you know?

Sure.

Are you allowed to do that?

Yeah, you’re allowed to do that.

7:51

But what’s the impact of that?

And it’s the same thing here.

I’m super excited for this guy.

I really like him.

He’s a great client.

He’s going through a difficult divorce.

His wife is being, you know, very difficult.

She kind of controlled the assets during their marriage, and she’s showing her colors right now.

8:08

So I’m excited that he’s at this place now and he’s moving on.

But you know, timing is really important because a difficult spouse sees that you’re moving on.

And even though they might want the divorce, they could still make it more difficult, prolong it longer because they don’t want to see your happiness for some reason or they don’t really want to see that you are moving on with your life.

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So just kind of calm down a little bit and make sure that this financially is not going to impact you in a lot of different ways.

And I know that we talked to him also about, you know, he wants to take this insurance, the cash value of his insurance policy and he wants to take a loan from his four O 1K.

8:51

And what he wasn’t realizing is that he waited all these years to build that money up for retirement planning.

A lump sum of money is generating him income on a monthly basis for the rest of his life.

So if he takes this money out and then changes his mind about this house, you can’t put it back into that tax deferred vehicle again.

9:12

You know, it it, it’s just you can’t do that.

So it’s really hard when you’re at retirement age to get a lump sum of money together that’s generating you a lifetime worth of income.

You know, I remember just asking him, are you planning on selling your other property to live there full time?

Well, I don’t know.

9:27

I might do that in a couple of years.

Well, then why would you not consider maybe getting a mortgage on that property until you sell your home and then pay it off?

So you have two assets working for you rather than taking a loan from your insurance product.

You know, even though you’re taking a loan and your insurance agent will say this is a great product, it’s earning 9%, which is what his insurance agent said to him, which is true.

9:50

It’s great.

But when you take a loan, you’re paying the insurance company a certain percent, it could be four or five and you’re netting out with four or 5%.

So that’s very different.

And you have to understand that implication, how it will affect you overall in your whole retirement planning, especially, you know, when you’re at retirement.

10:08

Age for sure, and you know, a lot of people believe that.

They generally know, especially when you’re far into your divorce or even early on, you know, if you and your spouse have made some preliminary decisions that may or may not pan out.

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You believe one spouse is going to retain the home or you’re going to sell or whatever you’re going to do.

But you really can’t anticipate what could happen that could change the whole structure of your division scenario.

And so if you make these decisions premature, you’re left with dealing with that in, in a way that if you had just waited, things could be better.

10:49

And, and look, I, I was in the same place, Catherine, I think you were in the same place in our divorce.

I wanted a suitable home for my children.

I was leaving the marital home for a variety of reasons.

And it was all I could do not to, it was all I could do to wait.

11:08

But I did make the decision to rent for the short period because there were a lot of changes in my divorce that I didn’t anticipate that would have severely impacted that home purchase and would not have worked out the way it worked out because I had waited.

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So it’s hard, it’s tough, but a lot of times waiting is very important unless you and your spouse, they can have very clear agreements and stipulations as to what the the purchase of that home means and it can be documented.

11:45

Short of that, you definitely rolling dice.

Yeah.

So you’re my, my, my mind is going in a couple different directions here by with some of the things you said.

And one of them is yes, I remember renting too.

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And I remember being really sad about renting.

I would left a very large home and went into a very small town home and I just thought the kids would never want to be at my place and they were always at my place.

I don’t even think they well, we’ll move on from that.

But and I can remember saying, Oh my gosh, why don’t you just go to dad’s?

12:19

He’s got the pool, he’s at the big house we’re in this we’re all in this condo.

And they said, mom, when I what we when we walk in here just smells like home, you know, cooking, what have you.

And I remember that made me feel so much better, right.

But the other thing is so many people now when we’re going through division scenarios and their hell bent on keeping the marital home one, it’s easier to keep it.

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You don’t have to just uproot your life and move all around.

And two is you think that it’s going to really add to your kids stability, right?

So you just don’t want to get out of the marital home.

But giving them the time, going through our process and going through different scenarios.

12:59

When you have that realization that you’re stuck with that home and everything that goes along with it and you’re giving up lump sums of money someplace else, that could be the security of your future.

We are seeing a lot of our clients have an aha moment.

13:14

Like wait a minute, maybe I’m not really attached to this house.

You know, maybe I need to really consider moving on from this house because I can’t afford to give up a lump sum of money, you know, and vice versa.

We have the ones that, you know, the realization is I’m better off keeping this home because I can assume this mortgage and I can keep this 2% interest rate.

13:34

And in my area, rent is much more expensive than my mortgage payment.

So I’m, and I’m younger and I’m willing to rebuild my lump sum money And I, I think I could do that.

So it’s, it’s our role is not to tell you what to do.

You know, our role is to make sure you’re clear on the impact to these scenarios.

13:54

And then you should not be rushed into making that decision.

I don’t mean take years to decide what to do, but take at least some time to process this information and process what the impact of that is.

And then make your decision based on the data and how that will relate to your future, not the motions that you get caught up in.

14:13

For sure.

And you know, that is the huge benefit of the NDS financial portrait.

You know, if if our clients decide to move ahead, we’re satisfied that they know what the risks are, they know what the vulnerabilities are, they know the questions to ask for divorced professionals and that is our job every day.

14:36

And so if go ahead.

I was going to say I love what you said to the client about the case that we’ve been talking about.

You know, a realtor told him, you know, I put a clause in to protect you.

And when we pointed out that, you know, penalty is not really going to protect you and you gave him language to add to that.

14:52

Ask his attorney.

Yeah.

To ask his attorney to add this line.

What?

What does he think about this language to add as a clause to protect them?

You know, again, he wouldn’t have known to ask that.

Ask his attorney that.

And, you know, I don’t even know if he would have sent his attorney the agreement that he was about to sign off on.

15:10

Right.

Yeah.

Well, ’cause he doesn’t have to need his attorney’s permission.

But when you’re in the case, I get this is where you need a good attorney.

This is where your attorney shows up to tell you how you’re legally or not legally protected.

For sure.

And so knowing all of the data and information and the, I guess risk and vulnerability is so important as you navigate divorce and make these really big decisions.

15:35

Because look, we know that making big decisions like buying a home during a divorce can feel urgent, emotional and even empowering.

But without full financial clarity, those decisions can come with very long term consequences that you know you don’t see coming for sure.

15:52

Yeah, it’s so true.

And I, you know, I, I, you know, we got excited for him.

You know, I can imagine what his excitement is, you know, twofold what ours was.

But yeah, you need to sometimes just sit back and really get that clarity that you need.

16:09

Exactly.

So my divorce solution, Our goal is to help you move forward from confusion to clarity, clearing up the the space around you so you can make really good informed decisions.

So whether it’s understanding your marital property, the impact of using your 4O1K or life insurance or any other asset, or just deciding when the right time to make a move is, we’re here to guide you and help you make really good informed decisions.

16:37

So thanks, Richard.

I’m going to say if you have any comments, because we know real estate is really the top of the line right now, feel free to send it to us.

We’re happy to explore some of the considerations that come into play and share this episode with somebody else that you may know who’s going through this transition and is thinking about their real estate ownership.

16:58

We’re happy to talk about it.

Thanks for joining us.

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