- - Thursday, May 10, 2012

Q. My wife and I are in the process of a divorce and she wants to remain in the home that we jointly own. We have a mortgage balance of about \$342,000. I think we could sell the house for close to \$500,000 but she, of course, thinks it’s worth less than \$450,000.

The process is amicable, but I’m worried we won’t be able to agree on the home’s value. I’m afraid to rely on an appraisal because I have heard they are unreliable and inaccurate.

Can you provide me with an insight on how we can determine the true equity of our home?

A. My latest favorite expression to describe residential real estate and the mortgage business is to compare them to a tangled ball of fishing line. The Home Value Code of Conduct (HVCC) that was implemented a few years ago has resulted in appraisers valuating properties in areas unfamiliar to them. Additionally, the number of foreclosures and short sales has made appraisal reports less likely to reflect a home’s true value.

The bottom line is that you won’t know what the true value of your home is unless you put in on the market and sell it. Having said that, there are a couple of things you can do that may help the two of you agree on a value.

First, you can obtain one appraisal and agree to use its value to determine your home’s equity. If you want to avoid one party objecting to the value as too high or low, each of you could hire an appraiser and then use the average of the two values. If your wife’s appraiser values the home at \$450,000 and your appraiser values it at \$500,000, agree to a value of \$475,000.

Once you have agreed upon an intrinsic value of the home, it would be fair to discount the value by about 6 percent to take into consideration the real estate sales costs that likely would have to be paid if you sold the home on the open market.

Let’s use \$475,000 as the agreed-upon value. Here’s the calculation: \$475,000 X .94 = \$446,500. This is the new value after taking out sales costs. Next, subtract the mortgage debt of \$342,000 and your total equity is determined to be \$104,500. If your wife wants to keep the house, she would owe you \$52,250.

While this procedure is common and simple, snags often arise. First, your wife may not have the cash to pay you for your share of the house. She could refinance the house - which would be advised anyway, because you are most likely currently obligated on the mortgage - which would give her the cash she needs to pay you and also would remove your name from the mortgage.

More problems can occur. First, your wife would have to qualify for the loan. Second, most lenders, under the HVCC, will require a third appraisal because it won’t accept the other two. This could cause additional squabbles and, depending on the value of the third appraisal, could knock your wife out of qualifying range.

Even if your wife has the cash to buy out your share of the house, you still would want her to refinance in order to take you off the mortgage.

Therefore, my advice would be to have your wife refinance and agree to use the value of the lender’s appraisal to determine your share of the equity.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.