For most divorcing couples the marital home is the most valuable asset they have. If that house was purchased while the couple was married, the house is a marital asset and therefore divisible in a divorce. Even if the house was purchased before the marriage, if the house was put into both couples’ names or if the mortgage was in both parties’ names the house will be presumed to be marital property. If a house is marital property, we must determine how to value a house in a divorce before distributing all of the marital property between the two parties.
A house, however, is not a liquid asset. You can’t just say “cash out my house and give me half.”
Moreover, people usually have a huge emotional attachment to a house and one party to the divorce often wishes to keep the house…especially if the kids are going to stay living there.
When a house needs to be divided as marital property in a divorce, how do you value the house in order to divide the equity in the house.
Sell The House
There’s no better way to determine exactly what a house is worth than by simply selling the house. Without proper evidence valuing the house, “ordering the properties sold and the proceeds split [is] the only realistic way to divide the parties’ assets in an equitable manner.” In re Marriage of Hamilton, 128 NE 3d 1237 – Ill: Appellate Court, 5th Dist. 2019
If one party wants to force the sale, they cannot just demand the sale of the house if the other party is able to present evidence of the house’s value.
“Neither party should be allowed to benefit…from their own failure to introduce competent evidence of value at trial.” In re Marriage of Donald R., 432 Ill. Dec. 73, 88 (Ill. App. Ct. 2019)
If the party keeping the house cannot reimburse the other party for half of the house’s value then the judge will simply order the sale of the house.
There are many situations where the parties do not want to sell the house. Usually, this involves children staying in their childhood home until high school is over.
The house can still be sold by agreement…but at a future date. In this scenario, the person who keeps the house will be responsible for the mortgage but at the time of the sale, the house-keeper will be reimbursed for any balance of the mortgage that was paid off before the distribution of the proceeds.
Comparative Market Analysis
There are numerous ways of estimating the value of a home.
If you ask a real estate agent, they will recommend doing a comparative market analysis (CMA) of the home. This is the process that real estate agents use to determine the value of the house. It involves comparing the house with three other similar houses that are currently for sale or have been sold.
The point of a comparative market analysis is to determine what price at which the house should be listed for sale. But, if you’re estimating the value of the house, you’re not selling the house so this is usually the wrong value.
A house’s listed price is usually inflated because almost every house seller expects some good faith bargaining between themselves and the house buyer.
The advantage of a comparative market analysis is that it provides a high price (if that’s what you want) and the real estate agent usually does it for free (in the hopes that you do eventually sell the house).
Appraisal
A residential house’s appraisal value is completely different than a comparative market analysis.
A licensed appraiser determines the value of the house based on strict quantitative values not just comparisons with other similar properties. Since the housing bust of 2008, these strict quantitative measurements have become even stricter
An appraisal usually arrives at a price much lower than a comparative market analysis would.
Appraisals must not be speculative. Appraisals must appraise the property as it is…not what the property could be.
“We have consistently held that the fair market value of improved property is not the sum of the value of the building and the value of the land computed separately. For this purpose, the whole does not necessarily equal the sum of the parts. The value of unimproved land, adaptable for any use, may diminish, as land, when improved by the construction of a building and so committed to a particular use. For similar reasons, the construction of a building may not produce an increment in value equal to its cost, since the improvement may not be desirably situated.” Dep’t of Pub. Works v. Lotta, 27 Ill. 2d 455, 456-57 (1963)
An appraisal also costs money up front because an appraisal is far more in-depth than a comparative market analysis. Additionally, the appraiser has no back-end incentive in selling the house and receiving a commission (which the real estate agent has). So, the appraiser has to be paid up front for their work.
Competing Estimates of the Value Of The House
If the two parties disagree as to the value of the house, the two parties must have two separate estimates. The court will always consider an appraisal over a comparative market analysis for the reasons listed above.
But, if the two parties each hired their own appraisers each appraiser will have to testify as an expert in front of a judge to determine who is more credible.
“In order to determine the value of marital assets, the court must have before it competent evidence of value. While there is no rule of law regarding what type of evidence constitutes “competent evidence” of value, the value of real estate is ordinarily proven through the testimony of expert witnesses who have conducted appraisals of the property…[T]he testimony of a qualified expert may be rejected or found not to be credible evidence of value if it is not based on market analysis or an inspection of the home. ” In re Marriage of Hamilton, 128 NE 3d 1237 – Ill: Appellate Court, 5th Dist. 2019
The reason to be especially careful regarding which appraiser you hire is that a judge will not split the difference between the two appraisals (or at least they shouldn’t). The judge should say, “Appraiser X is more credible so I will accept their appraisal value.”
The parties can also testify to the value of the house. No one knows the house better than the parties and the parties can and should testify why they believe the house is worth more or less.
Can A Party Testify To The House’s Value?
Who knows the house better than the home owner? But, they better know the property in and out!
“Ownership of land usually indicates knowledge of the price paid for land, the income generated by it, and potential uses of the land, such that the owner likely has a reasonably good idea of the land’s value. [However, a] landowner may be shown to be incompetent to testify where it is affirmatively shown that special circumstances exist which indicate that [they are] unfamiliar with facts which give the property value.” Hill v. Ben Franklin Savings & Loan Ass’n, 177 Ill. App. 3d 51, 56 (1988)
“A party opposing the property owner-witness may make this affirmative showing [that the party testifying to value does not know what they’re talking about] on cross-examination, revealing the absence of probative value in the testimony.” In re Marriage of Vucic, 216 Ill. App. 3d 692, 703 (Ill. App. Ct. 1991)
Valuing The Other Marital Assets
When the judge does determine the value of the house and awards the entire house to one party, a portion of the house’s value will be awarded to the other party. This value has to be made up from some other marital assets. Those assets then must be valued accurately.
Usually the second largest asset in a divorcing couple’s portfolio is the retirement accounts.
The retirement accounts are NOT worth what the balances say. The retirement accounts are almost always tax-deferred which means the taxes have not been paid on them yet. So, the retirement accounts must be discounted by 30% or so in anticipation of the eventual taxes.
Often, a complete liquidation of assets in a divorce, the house sold and the retirement accounts divided by Qualified Domestic Relations Order is the best way to get an accurately equal division of marital assets. While this is logical, almost no one really does it. People are possessive and sentimental…and that’s okay.
If you have questions about how to value a house in your divorce, call my Chicago, Illinois law office to speak to an experienced Illinois divorce lawyer.
