Protect your credit scores during divorce by understanding the specific credit risks involved and implementing strategies to protect your credit.
Get A Home Inspection Before You Buy Out Your Spouse
Minimize financial risks and litigation costs by getting a home inspection before buying out your spouse's equity in a divorce.
Getting a home inspection to identify potential problems that would reduce the home's value before buying it is considered a “No Brainer” and standard practice. However, people rarely consider getting a home inspection before they buy out their spouse’s equity in a home during a divorce. The result is a significant financial risk at a time when they can least afford it.
To eliminate this financial risk, you need to understand the different potential issues to look for, identify any issues with your home and the costs to address them, and then adjust your divorce agreements and plan accordingly. Ultimately, it all starts with a home inspection, even if you are confident there are “no problems” with your house.
Many assume they would know of any problems with their home because they live there. Unfortunately, many homes have problems people don’t know about. Furthermore, we are looking for more than current issues like roof leaks or broken pipes. Even though you may “know” your home, there are three reasons to get a home inspection before you buy out your spouse.
- UNKNOWN ISSUES – Most homes have some unknown issues requiring repair because most homeowners are not home maintenance and mechanical system experts. The reality is that most of these unknown issues are financially inconsequential, but the risk of very costly repairs remains. Even worse, many of these problems get more costly the longer they are not fixed. Repair costs can be anywhere from thousands of dollars to tens of thousands of dollars.
- DEFERRED MAINTENANCE – Homes require a significant amount of routine maintenance. Cost estimates for annual maintenance range from 1% to 5% of the value of the home, depending on the age of the home and systems. While maintenance is costly, repairs and replacement costs are 5 to 10 times more than the cost of proper maintenance. Significant deferred maintenance can easily be tens or hundreds of thousands of dollars.
- AGE OF MECHANICAL SYSTEMS – Every system in a home has a useful lifespan. These systems include those you normally think of as a furnace and air conditioner and those you may not consider a “system,” like the fuse box and painted siding. The original lifespan depends on the age, style, design, and quality of the original system and other factors like the environment and climate of the home. The remaining useful lifespan of each system also depends on the age and maintenance of the current components. If each system in a home is nearing the end of its lifespan, the home owner can have a very big bill to pay over the next few years that can easily reach a hundred thousand dollars.
All of these risks can vary greatly depending on the age of the home, the date and quality of any remodel or system replacement, and the maintenance performed on the home. The dollar amount of these risks can range from thousands to hundreds of thousands of dollars. Getting stuck with a property that needs repairs is a costly mistake many spouses find themselves unable to recover from financially.
Not only do you not want to get stuck with problems, but you do not want to overpay your spouse for their share. The home's value used to determine the buyout price during the divorce assumes the home is in proper working order. In fact, standard appraisal verbiage states that the appraiser has no knowledge of and assumes there are no hidden physical deficiencies or adverse conditions, including needed repairs and deterioration, that would make the property less valuable. Once a divorce is final, you cannot go back and renegotiate the price or ask your ex-spouse to help pay for repairs.
Planning to “just sell the house if there are problems” is not a reasonable solution because most buyers will get a home inspection and find any problems. Once they find issues, they will either ask you to fix them, reduce their offer price, or buy another property. Even if you have the money to fix the problems, you may not have the time to finish them before you need to complete the sale. That is why having a home in good condition that you can sell at any time is s truly the best strategy, no matter what your situation.
A home inspection report is a written document based on a detailed professional assessment of a property's physical structure and systems. The report also includes comments on the property relative to the current building code. It is different than an appraisal because it details the condition of the mechanical condition of the property as well as any necessary or recommended maintenance and repairs that could affect the home's value. The appraisal is an opinion of the home's value, assuming the property is in good working order. Essentially, you need both reports to know the real value of a property based on the exact condition.
Here is what to look for when getting a home inspection:
- MAJOR HOME COMPONENTS – roof, foundation, HVAC, sewer/septic, electrical, plumbing, water heater, sprinkler system, exterior, windows, driveway, drainage, radon, fixtures, garage doors, and other systems in the home.
- MAINTENANCE – All systems/components must be in good mechanical condition and working as planned without any required maintenance. If any maintenance is required immediately, the report should include a cost to complete it.
- ECONOMIC LIFE – Include the age of each system/component, how long they should last, and how much it will cost to replace them. The expected life of components and the cost to replace them can vary greatly. Here are examples of life expectancy and the typical cost to replace some systems:
- ROOF – 15 to 50+ years | $15,000 to $150,000
- HVAC – 15 to 25 years | $15,000 to $50,000
- SEPTIC – 20 to 30 years | $10,000 to $50,000
- WATER HEATER – 10 to 15 years | $1,200 to $5,000
Getting a home inspection has benefits beyond just finding problems. Look for a home inspector who provides these in their standard report or for an additional fee:
- REPAIR ESTIMATE REPORT (RER) – This document lists each maintenance and repair item with a rough estimate to complete the work. This report saves a lot of time and effort in a divorce when you may need to start negotiating and adjusting agreements right away without time to wait for formal work estimates from contractors.
- MAINTENANCE CALENDAR – This schedule or calendar lists every system in your home with the normal maintenance timing, tasks to complete, and when to complete them next. It should also include details on parts like the brand, model, and air filter size for your furnace.
- HOME EDUCATION – Great home inspectors really know their stuff and enjoy educating homeowners about the property. After they complete their inspection, they can walk a homeowner through the property, showing them any current problems and items to pay attention to in the future, how and when to perform basic maintenance, and when to call a professional for maintenance or repairs.
For many homeowners, the education about the mechanical systems in their home, knowing what to look for to identify future problems, and having a maintenance schedule to follow is worth the home inspection cost. Considering the cost of a home inspection is less than the cost of nearly any repairs and most deferred maintenance, it is a “No Brainer” because there is a great financial risk to not getting one.
If you are still unsure about ordering a home inspection, consider the cost of a home inspection, like car insurance. You pay a fee to remove the risk of something you cannot afford. Paying a few hundred dollars is worth removing the risk of paying thousands or tens of thousands in the future.
TIP: Before ordering the home inspection report, I recommend couples agree on a professional to use and trust as well as the method they will use to determine splitting any potential costs. This strategy reduces the conflict of interest that inevitably comes up where the spouse keeping the house wants more items fixed and replaced while the spouse not keeping the house does not think items need to be fixed. Keep in mind that a well-maintained home with new systems can have a higher value than a house with average aged systems.
If your report reveals issues that reduce the value of your property, you need to know how to address them. First, you must discuss the cost of the issues with your spouse. Second, you will need to look at options to pay for the repairs in addition to when and who will complete them. Finally, you will need to decide how to proceed.
Determining the cost to resolve existing problems and deferred maintenance is straightforward. You simply need to contact professionals for written quotes to complete the work. The challenge will be agreeing with your spouse on what needs to be fixed and the best way to fix it.
Calculating a fair cost for systems nearing the end of their life expectancy is more difficult because it is not as cut and dry as addressing existing problems. The house does not intend to have every system in “like new” condition. Instead, the motivation is to ensure the value considers the exact condition and age of the property and informs the spouse retaining the property of the remaining life of each system. This way, they can pay a fair price and plan for maintenance and potential replacement costs.
Once you agree on the cost of repairs and any adjustment for the remaining life of the systems, you need to decide on a plan to move forward that will account for the value of the repairs, determine how to pay for the repairs, and when to complete the repairs. This is much more complex than it sounds, and you can make many mistakes now. You need to be very careful about using any credit cards, store cards, or financing to pay for repairs because it can often create problems with other financing to buy a new home and refinance the existing loan on the home.
Obviously, you can pay cash for the repairs. You can also reduce the agreed value of the home to account for the difference. You can also adjust other assets in the property settlement, like retirement, to make up for the repairs. Again, be very careful, but you can finance the repairs in several ways as well.
Completing repairs before the buyout of the property avoids the possibility of surprise costs to complete the work. Another option is to complete the work after the property buyout, but there is a risk of higher costs. It is possible that some work may need to be completed prior to any refinance or sale of the property. Ultimately, the best course of action will depend on the type of issues, your finances, the time available, and the risk you are willing to assume.
Unfortunately, far too many homeowners find costly problems with their homes after their divorce. These costs can be financially devastating because they are now on their own to pay for them at a time when they can least afford to do so. The real travesty is that the solution is standard practice when buying any other home and only costs a few hundred dollars. Most people just never think about it until it is too late, and they realize what a big mistake it was. You simply must get a home inspection before deciding to keep the home in your divorce.