In the age of HGTV and the ever-fluctuating real estate market, it can be difficult to reconcile how real estate is valued for purposes of divorce litigation versus what a homeowner believes their real estate is worth. Let’s face it, we all believe that our personal residences are probably worth more than they actually are because our homes are personal to us. We live there, we raise our children there, we take care to ensure that our homes are well maintained, decorated nicely, safe, located in a good school district, and so on. The care that we take to make our real estate a home, combined with the personal memories that are made there, often skew one’s perception of what real estate is worth.
For purposes of divorce litigation, the value of real estate is defined as its “fair market value” (FMV). What does fair market value mean? It is the amount a buyer is willing to pay on the open market without any requirement to buy. So how do you figure out FMV for your marital residence? For some, a value for marital real estate can be agreed upon because the parties are familiar with the real estate market in their area, there are comparable homes in and around the area in which their home is located and the parties are sophisticated enough to be reasonable about what their home would sell for. Others look to Zillow and other similar internet resources for value. I often caution my clients to ensure that any value they are agreeing upon, or that they are relying upon based on internet research, should have a second look either informally by a licensed real estate agent who can perform a Comparative Market Analysis, or through a real estate appraisal performed by a licensed real estate appraiser.
When parties wish to save as many resources as possible, a Comparative Market Analysis is a good start in determining value. This analysis is performed by a licensed real estate agent who looks at the marital residence and hypothetically places it into the current market conditions. Essentially, it is what a license real estate agent would do when meeting with potential clients to determine an appropriate listing price. If the comparative market analysis value cannot be agreed upon by the parties and they’re unable to agree upon a value, a certified real estate appraisal is needed.
A certified real estate appraisal for a piece of residential property typically costs $500-$600. A licensed real estate appraiser will personally inspect the residence inside and out, and will also consider comparable sales in the previous year within a reasonable distance of the real estate that is being appraised. The process is similar to that of a Comparative Market Analysis but is more substantial.
For a market analysis and for an appraisal, the parties will receive a written report indicating the value and how it was obtained. This value can be used for purposes of negotiation and or divorce litigation. However, that is not the final equity value in Lancaster County divorce litigation, and in many other counties in the state of Pennsylvania. For purposes of determining the equity to be divided by the parties in a divorce matter, the real estate’s value is reduced by 7% to account for the required 1% transfer tax and the 6% real estate commission paid in most residential real estate transactions. The reduction established by the case of Bielicki v. Bielicki, 601 S.W.2d 917 did not focus on the value of real estate, but instead, discussed reasonable costs of sale related to a marital business. The concept of considering the costs of sale of a marital asset established by Bielicki then grew into the general concept that any marital asset that comes with the inherent costs of a sale, now or in the future, should be reduced by those costs to effectuate economic fairness.
So, in determining the value of your marital real estate for purposes of negotiation and/or divorce ligation, an initial value is established, then reduced by 7% as established by the Bielicki analysis. Finally, the value is further reduced by the current balance of any mortgages or liens against the real estate. The net number that results is the equity value of your marital residence for purposes of divorce.
It is often necessary to rely on a real estate appraiser to ensure that your marital residence is valued correctly. Your lawyer can help you find the right person so that you can leave this important task to the experts and focus on the other things that need your attention when you are considering a divorce.
Holly Filius is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. She received her law degree from Widener University School of Law and practices in a variety of areas, including Family Law.