You and your spouse own a home together. One of you wants to buy the other out to divide the community property equally. How do you determine the house value in divorce and calculate the equalization payment?
If you negotiate a marital settlement agreement or stipulated judgment in California, you and your spouse can mutually agree to the house value using whichever data you choose. Spouses often use the sales data for comparable properties that they find online at Zillow, Redfin, and Realtor.com or they consult a mutually agreeable real estate agent or appraiser to provide an estimated fair market value or real property appraisal.
If you ask a California family law judge to determine the value of a home, you and your spouse must each present evidence of the fair market value of the house at the time of trial, which realistically is the value of the house at least 30 days before trial on the discovery cut-off date. A valuation of the house at the date of separation is only used in extraordinary circumstances such as in a case where one spouse had exclusive management and control of the house after separation and damaged or otherwise devalued it.
The evidence you present at trial to determine the value of real estate can include your testimony or the “expert” testimony of a real estate agent or broker or appraiser. The written evidence you admit may include sales reports for similarly situated properties that are generated by realtors using the MLS (Multiple Listing Network® is an independently owned and operated real estate advertising and listing service company for real estate firms that maintains the sales prices and histories of all properties listed on MLS by realtors). You might also present written real estate appraisals to prove the value of the house.
Real estate appraisals are usually prepared by appraisers licensed by the State of California’s Bureau of Real Estate Appraisers. Each spouse may hire their own independent appraiser, they can agree to use a joint appraiser, or the court can order and appoint one appraiser to serve as a court expert.
Real estate appraisers generally use two different methods to determine the value of a house. The first method is the cost approach, which takes into consideration the cost to replace any structures on the property if they are destroyed, the value of the underlying real estate, depreciation, and various other factors. The second method is the sales comparison approach, which takes into consideration, the prices of comparable homes that have sold “recently,” which could mean in the last few days, weeks, months, or years in the case of luxury properties. Factors such as lot size, square footage, style, age of house, garages, fireplaces and amenities are matched as closely as possible to determine which sales prices are most representative of the value of your home. If you aren’t familiar with real estate appraisals, you may find one in the closing documents provided by the escrow, title company or lender you used to purchase or refinance the home.
Real estate brokers or agents usually use the sales comparison approach or “comps” to formulate their opinions of value, but they also may consider current market data that makes the comparable values less relevant. For example, if the real estate professional just listed two comparable homes for sale in the neighborhood, this could lead him/her to conclude that there is or will be a glut on the market and the house’s value is now less than the comparable values, or there could be off-market bidding wars that drive up the value in the expert’s opinion.
The appraised value of a home can be more or less than the comparable value. The fair market value or actual sales price can be less or more than both the appraised and comparable values. If spouses present conflicting values at trial the judge must choose either value or use that of an expert appointed by the court. The judge is not permitted to split the difference between the conflicting house values. He/she has to choose one or the other.
Calculating the Equalization Payment to Split Community Property 50-50
Once the value of a community property house is determined, spouses or a judge will determine the equity in the home by deducting the community property secured loans and lien balances from the fair market value. If a spouse has a valid separate property right of reimbursement under California Family Code § 2640, the amount of the reimbursement will be subtracted from the equity and reimbursed to the separate property claimant first, and then, the remaining community property equity will be divided equally. If one spouse is buying-out the other spouse, the equalization payment will be one-half of the net equity and it can be paid in cash, installments, or by trading an interest in another asset of equal cash value, such as another home, cars, boats, or stocks.
Judges generally only subtract estimated sales commissions, closing costs, and transfer taxes from the equity to determine the value and equalization payment if the house is being awarded to one spouse with the intent that it will be sold in the immediate future. Judges rarely subtract speculative future sales costs from the equity in a house when determining the value for purposes of dividing the property in a California divorce.