One situation that comes up with some regularity for a divorce attorney is when a client puts an offer on a house before their divorce issues are resolved. These clients unwittingly place themselves in a very difficult position.
An Offer to Purchase, if accepted, legally obligates a buyer to close on that house, regardless of whether their divorce issues are resolved by that closing date. But, if the property division (equitable distribution), spousal support (post separation support and alimony) and child support outcomes have not been resolved by the closing date, how will the buyer know whether they can afford the house? How will they prevent their spouse from having an ownership interest in their new house? How will the buyer pay for the house? How will the buyer know if he will qualify for the mortgage if he cannot tell his lender how much he will be paying or receiving in support or what kind of assets and debts he will have after the divorce?
A contract for the sale of a house typically contains a contractual deadline by which these things must be figured out, or the buyer loses earnest money or good faith money, which can be thousands of dollars. And for most people, the worst part is that they don’t get the house that they have now started dreaming about.
That deadline has numerous negative impacts on a divorce negotiation: It ramps up the time pressure in a divorce negotiation, gives the spouse leverage in the negotiation, potentially gives a spouse a property interest in the new house and increases legal fees.
Time pressure is not conducive to well thought out decisions. And in divorce, especially collaborative divorce, the goal is well thought out decisions. The feeling of “I want that house” or “I’m afraid of losing my earnest/good faith money” causes most people to make different decisions and concede more than they would without the rapidly approaching closing date .
Further, the spouse and his or her attorney will be aware of the contractual obligation to buy the house. In an adversarial case, that leverage will be overtly and aggressively employed against the buyer; e.g. “You can either accept our proposal or lose that house and your earnest money.”
In a collaborative case, the spouse and his attorney will try to accommodate the buyer, and everyone will work hard to avoid a problem (because it doesn’t help the family to give away thousands of dollars to a stranger when you default on the contract to purchase). But it is not their job to help the buyer meet her legal obligations under the contract she entered. The closing date puts a lot of extra pressure on the process that doesn’t help anyone, especially the buyer.
Legally, if a spouse purchase a house before he is divorced, and doesn’t have a legal release of his spouse’s interest in the new house, then his spouse may have an ownership interest in that house. That is not a good risk to take. His title insurance company may even refuse to insure his title, which means he will likely not get the loan he needs.
In addition, the extra work that is usually required to accommodate a closing deadline will cost more in attorneys’ fees. The attorneys typically have to shift their focus from “what’s the best long term resolution” to “how do we avoid the immediate problem”. At the very least it requires several additional conversations, emails and phone calls to determine how to deal with the new deadline. Not to mention that, in collaborative, the spouse will be wondering why the buyer took the unilateral action of committing to a big financial obligation before a resolution of the divorce issues was reached (which is typically contrary to the commitments made in the collaborative law agreement). That can create resentment or a lack of trust, neither of which are helpful in a negotiation, or for a future co-parenting relationship.
This is not to say that people cannot buy houses during or soon after their divorce issues are resolved. It can happen if discussed and planned in advance. And, in collaborative cases, we have frequently been able to avoid the potential problems of a premature contract to buy a house through quick and cooperative work.
Nonetheless, putting in an offer to buy a house before the legalities of your divorce resolution are official can present a number of serious problems that are best avoided.
If you are thinking about taking this step, do yourself a favor and talk to your divorce attorney before you make an offer.