As co-ownership becomes a popular antidote to unaffordability, expect to hear about ensuing acrimony.
“On paper, it seems like a great idea, but in reality…”
Steve Arruda, a Century 21 Regal Realty sales rep, agrees that unaffordability in cities like Toronto and Vancouver is catalyzing creating living arrangements, but he can see myriad problems arising from ones like co-ownership.
“Everybody has the best of plans, and on paper it looks perfect, but when they move in with each other, who’s responsible for what? What if one person wants to sell early because they got a job on the other side of the country or far outside of the city?”
While co-ownership between friends can be tricky, it becomes amplified when more than one family owns and shares a home.
“I’ve had ones where two friends bought a place together and thought it’d be a great idea and good for their families, but they didn’t buy a mansion,” said Arruda. “It was a crammed space for two families and four children. With the respective families or events they host, there will be issues that way. They have the best intentions, but when you’re living in a crammed space, function becomes a different story.
“It could be happy when two friends share but when you start bringing in partners—more personalities under one roof could cause a problem.”
Arruda concedes, however, that the arrangement has better likelihood of succeeding if a duplex is the shared abode. Not to say it won’t have its share of problems.
“I find the best option for that is if the home is divided equally into a duplex, each with its own kitchen and bathroom, and maybe they have a shared living space,” he said. “But if one person wants to sell, the other has to sell or buy that person out.”
Manu Singh, a broker with Right At Home Realty, doesn’t recommend co-ownership but nevertheless suggests both parties draw up an exit strategy.
“They should have an agreement in place, an exit strategy,” he said. “Just a simple contract, not a complicated one, that lays out what the exit strategy is should one party decide to move on. If it’s for investment purposes, maybe the appreciation rate reaches such and such level and only then can the partner decide to sell.”
Singh also recommends a minimum hold period of five years “to recoup a lot of costs of the transaction, like the Land Transfer Tax.”
Source: Canadian Real Estate Wealth – Neil Sharma25 May 2018
Q: My son and his common-law partner bought a condo together in Vancouver last year—which has since gone up in value. The relationship did not last and she would like to buy him out as both their names are on title. Are you aware of the steps involved to legally proceed with a real estate buy out and is it a wise move from an investment point of view?
— Norma R.
A: Hi Norma. I’m sorry to hear that your son is in this position. Break-ups are hard and can be exasperated when a division of assets is necessary.
I’m assuming your fear is that if your son accepts a buyout from his ex, he may then be priced out of Vancouver’s hot property market.
To minimize the impact of future property price appreciation, he should take the money and buy his own condo or home.
Your fear—that by giving up ownership of the condo he misses out on future appreciation—neglects how difficult decisions can be with someone you choose to no longer build a future with. Just imagine it’s five years from now. Your son has met someone new and he is happy. Very happy. He wants to buy a place with his new love and asks his ex if she could buy him out of this condo. His ex, on the other hand, has just gotten out of another relationship; she is unhappy, bitter and feeling defensive. How well do you think your son’s request will be taken? Probably not all that well. Of course, things could work out totally different, but that’s just it, we don’t know. For that reason, I’m of the belief that it’s always a good idea for each part of a dissolved partnership to sever emotional, physical and financial ties. As soon as possible. Remember, it’s already hard to make unemotional decisions about what to do with an asset when hurt or regret or anger or disappoint lingers, never mind when years have passed and life has unfolded in unpredictable ways.
The dilemma, then, is how to make sure that both your son and his ex are treated fairly when splitting this asset. This should be relatively easy, as long as they agree to pay for some expertise. The first is to pay for an appraiser who specializes in divorce settlements. This appraiser will be able to provide a “fair market value” report—a snapshot of what the property is currently worth if it were sold in as-is condition on this specific day. This FMV report would give a price or price range that your son’s ex could take to the bank in order to obtain mortgage financing. She would then be responsible for paying your son half of the condo’s FMV. He can accept this money free and clear, as he doesn’t have to pay taxes since the condo was his principal residence.
As to your fear of losing out from an investment perspective, remember that he will be selling his portion of the condo to his ex and, if he chooses, buying a new condo in relatively similar markets. That puts him in a net-net position—what he gained in price appreciation on the sold condo will help with current, higher condo prices.
Finally, when it comes to the legal process please advise your son to pay a mediator or lawyer. A few hundred or even a few thousand spent on professional, unbiased advice is well worth the money spent. If he wants to focus on a quick resolution, look for a lawyer or mediator that specializes in uncontested divorces. These professionals realize that not everyone wants to battle over every cent in court and will work to find a fair, quick resolution. Also, by employing a legal professional you are assured that all the paperwork and documentation required to remove your son’s name from the property title and the mortgage documents will be complete and filed, leaving him free and clear to enjoy the rest of his life.
When divorcing partners divide their assets, the split isn’t always as fair as it first appears. Here’s what you need to know.
Two weeks after his divorce, Phil Doughty received a blunt letter from his ex-wife’s lawyer. It informed him he’d contravened his settlement by not giving his ex her $100,000 share of his pension within 10 days of the divorce.
“It was a knockdown punch,” says the retired teacher from Montreal. “I had no idea I had to pay her right away, or that the money would come directly out of my pension fund.” Doughty thought his ex would simply get a share of his benefit after he stopped working. “I’d never heard of a company taking money out of a pension eight years before retirement.”
With his pension fund depleted, Doughty’s monthly cheques were reduced by over a third when he eventually retired, yet he was still required to pay spousal support from what remained, leaving him strapped. “I had to find another lawyer to help me get out of those support payments I couldn’t afford anymore.”
Doughty (we’ve changed his name, and those of all the featured subjects in this article) believes his pension arrangement should have been handled differently—at the very least it should have been explained to him properly. “I guess it was just something the lawyers worked out between them,” he says. “My lawyer and I never really talked about the pension.”
It seems hard to believe a lawyer would not talk to a client about how such an important asset would be divided, but Doughty insists he would have remembered such a conversation. His situation is just one example of how partners frequently get divorced without understanding all the financial implications.
“Divorce changes a person’s financial situation dramatically and often there is no planning for it,” says Debbie Hartzman, a Certified Divorce Financial Analyst in Kingston, Ont., and co-author of Divorce Isn’t Easy, But It Can Be Fair. (CDFAs are planners with additional training in the financial impact of separation and divorce. See “Where to get help,” at the bottom of this page.) “I’ve had clients say things like, ‘I just spent four years fighting with my ex, I have this cheque for $400,000, and I have no idea what that means in terms of my financial future.’”
Surely part of a lawyer’s job entails discussing financial matters surrounding divorce. Apart from custody of children, aren’t money and property the big issues in divorce? “A family lawyer’s job includes giving advice about a number of financial issues, but we are not financial analysts,” says Bruce Clark, who observed many divorce-related financial problems during his 35-year career as a family lawyer in Toronto.
Lawyers may not anticipate the long-term implications of divorce-related financial matters. For example, Hartzman explains it’s possible to have different divisions of assets that all meet the 50/50 requirements of the law but have profoundly different financial consequences for the divorcing partners. Her book includes a case study that presents different ways to legally divide the assets of a middle-class couple. Both are 58 years old, and the largest assets are the house and pensions (his is four times more valuable than hers). In one scenario, the assets are split more or less equally, so the initial net worth of the two partners is about the same. However, her share of the man’s pension is paid out as a lump sum, and the support payments are not structured to reflect the fact his post-retirement income will be higher than hers. As a result, after age 65 the woman’s net worth and monthly cash flow flatline, while the man’s relative financial situation steadily improves. “The person with the pension can end up in a much better financial position than the person with the house, particularly if the pension is indexed to inflation,” says Jim Doyle, a CDFA with Investors Group in Vancouver.
Here’s a different scenario: she keeps the house and gets only a quarter of his pension. To the untrained eye that seems to be simply an alternative way of dividing the pie equally. Yet this arrangement ensures the woman’s net worth stays similar to the man’s for the rest of their lives, without diminishing his financial situation.
Of course, case studies do not translate into rules that ensure ideal financial arrangements for every divorcing couple. That’s why it’s a good idea to consult a financial professional as well as a lawyer if you’re going through divorce or separation.
Don’t assume every asset must be split down the middle. “People often want to split up each individual asset, but not all assets are created equal. It’s usually better to look at assets in terms of how to divide the whole cake,” says Hartzman.
Doughty is not the first divorced person to be subject to pension shock. Many people don’t even realize pensions have to be shared after divorce, says Clark. “In my experience, most people consider their pensions to be their personal property, as opposed to an asset that must be shared equally after a divorce. In a longer-term marriage the pension is often the single biggest asset.”
This was the case for Doughty and his ex-wife, who had sold their matrimonial home shortly before separating. By law his ex-wife was entitled to half the teacher’s pension that accumulated during their marriage.
“Pensions are very, very complicated assets,” says Sharon Numerow, a CDFA and divorce mediator with Alberta Divorce Finances in Calgary. “Defined benefit pensions must be independently valued by an actuary, and the rules about paying out a spouse vary from province to province.” For example, in Alberta there are no longer any provincial pension plans that allow monthly payouts to an ex-spouse when the member spouse retires. Therefore, the only option is to give the ex-spouse a designated value that is transferred into a Locked-In Retirement Account or LIRA (called a locked-in RRSP in some provinces). “This almost always has to be done after the separation agreement is signed, and not usually at retirement,” says Numerow.
On the other hand, Ontario recently adjusted its Family Statute Law in the opposite direction. Now a portion of a person’s pension payments can be made directly to an ex-spouse after retirement. Another possibility is for the spouse without the pension to get another asset equal to the value.
Bottom line, don’t underestimate the potential for misunderstanding pension division. It’s important to work with your lawyer to understand the legal issues, then talk to a financial planner who can help you appreciate the short-, medium- and long-term implications of the division of this and your other assets.
Close to home
Another key, says Hartzman, is determining whether it’s viable for one partner to stay in the family home. There are two main questions: Can one partner actually afford to keep the home? And how will keeping the home affect that person’s financial future?
“Most people I’ve worked with live in houses that require two incomes, so after divorce one person would be trying to maintain the home on half as much income, and often it just isn’t affordable,” Hartzman says. “Can you imagine how hard it is to tell someone already going through the emotional turmoil of divorce that they can’t afford to stay in the family home they and their children are so attached to?”
Sandra Baron, an Ottawa mother of two, did manage to stay in the matrimonial home after her divorce. A financial planner helped her figure out how to pull this off. “My first lawyer really didn’t seem to understand my financial situation,” Baron explains. “I went to see a financial planner and asked if I could afford to buy out the matrimonial home from my husband. He helped me work it out.”
Baron and her spouse had always lived within their means. They had no debt other than a mortgage with much lower principal than they qualified for. That, combined with support payments and Baron’s earning potential (she had been an at-home parent most of her marriage but began doing contract work after the divorce), meant she was able to keep the family home.
The financial planner also gave Baron some tax-saving advice on how to invest some money she had brought into the marriage. Since she had that money before the marriage and kept it in a separate account, it was not an asset that had to be shared equally. However, had she used that money to help pay down the mortgage, it would have become part of the value of the matrimonial home and therefore a joint asset.
This is also the case if one spouse receives an inheritance or gift during the marriage. In most provinces, as long as the money is kept in a separate account it does not have to be divided equally after a divorce. But if it is used to purchase a joint asset, such as a house, it becomes the property of both spouses. (In some jurisdictions growth in the value of the inheritance or gift may count as an asset to be shared.)
Perhaps the biggest factor in Baron’s situation was that she and her husband actually saved money for their separation. “It was almost five years from the time we realized the marriage was likely not able to be repaired that we saved for the eventual separation. Unless the relationship was harmful, I felt it was in the best interest of everyone—particularly the children, who are all that really mattered in the end—to plan and wait so things would be better for them financially.”
It’s a safe bet the path Baron and her ex-husband took is not typical of divorcing couples. Obviously they got along well, even after deciding to separate; they had no debts other than the mortgage and were both well acquainted with their family financial situation. The opposite is much more likely, says Numerow. “It’s common for one partner to know very little about the family finances, and they often don’t know the extent of their debts.”
Lady in red
When Anna Masters, of Taber, Alta., separated from her husband she moved in with her sister and started a new job at a bank. She also applied for a new credit card through that bank, so the person doing the credit check was one of her colleagues. When the Equifax credit report came through, the coworker quietly asked Masters to step into her office. “You are behind in all your bills and credit cards. Most of them are in collections,” the embarrassed colleague said.
“I was horrified,” says Masters. “Even the cell phone bills weren’t paid. I didn’t even know my ex had his own cell phone.”
That’s not the worst of it. Masters’ ex-husband had a line of credit she didn’t know about it, which listed her as a co-signer. Masters says he must have forged her signature on the application.
It’s not hard to find similar tales of woe. Alan Leclair of Winnipeg tried to remortgage his house not long before he and his wife split up. “When the credit check came in the banker said to me, ‘You’ve got debts you didn’t tell me about. You’d better go home and talk to your wife about it,’” says Leclair. These debts were considerable—between $30,000 and $40,000 in unpaid credit card balances. Fortunately, Leclair’s ex-wife eventually agreed to take responsibility for them.
Masters was less fortunate. She got stuck with a big chunk of debt—loans and credit cards her husband was supposed to pay off, but didn’t—as well as the line of credit he’d fraudulently put her name on. “I could only get part-time work at the bank, but I worked every other junk job I could find. It took me three years, but I paid off my share, and in a way I’m glad I went through the experience. I’m in control of my finances now,” Masters says.
The one smart thing Masters feels she did in the lead-up to her separation was to start setting aside money (“Omigod money,” she called it) so she’d have something to fall back on in an emergency. “Even before I realized the full extent of the financial mess we were in, I knew my ex was spending irresponsibly, so I started squirreling money away.” That money—about $3,500, which she kept in a sock hidden under a pile of towels in the linen closet—ended up being used to cover her living expenses during a spell of unemployment after moving to a new town after she was separated.
Leclair did something similar. “I had a friend who was going through a divorce and I asked him for advice. He said, ‘Put a few bucks away.’ So I did.” He hid cash in his house and even left about $500 at a friend’s house. “When the separation happened I was in scramble mode, dealing with all kinds of things. It was comforting to at least know that money was there,” he says.
Clark, the family lawyer, explains any money you stash prior to separation “will still be subject to division, but you will have the use of it while property issues are being sorted out. There is nothing illegal about this as long as you declare the amounts you have put aside.”
It’s hardly surprising that people have trouble working through issues like asset division and debt. But the path to divorce is laden with other potential financial mistakes.
One is trying to settle too fast. “People want it settled tomorrow,” says Jim Doyle, the financial planner. “Emotions often determine the choices rather than making the numbers make sense. I say to people, ‘Let’s slow down and do the math.’” He says it’s common for partners to make hasty, ill-advised decisions about asset splitting just to avoid conflict. “Sometimes in relationships where there is an imbalance of power, one person might simply capitulate, resulting in a financial decision that may have negative consequences down the road.”
Don’t ignore the tax implications. “One of the biggest items that is often overlooked in separation and divorce agreements is tax deductions, such as child-care expenses, and credits that may apply to separated and divorced parents,” says Numerow. For example, a divorced parent can claim one child as a dependent, but both parents cannot claim the same child.
Another dangerous road is trading property for time with children. “Big mistake—just don’t do it,” says Numerow. In addition, remember that spousal or child support and asset division are, for the most part, completely separate issues.
Finally, if you’re a common-law spouse, don’t assume the process is the same as it is for married couples. Generally, legal requirements regarding spousal and child support are the same, provided a couple has been living common-law for at least two years (three in some provinces). However, the division of assets is not automatic, as it is in a marriage, which comes as a surprise to many people, Numerow says. “Go to a lawyer and find out what you do and don’t have to share. Laws concerning common-law separations vary by province.”
One message Clark, Numerow and Hartzman all want to get across is this: both partners should always be aware of the family’s financial situation. If one partner is more hands-on with the money, the other at least needs to understand the big picture. “I’ve met a lot of spouses who weren’t involved in the finances and they’re ashamed,” says Numerow. “I tell them, ‘Don’t beat yourself up over it. Now is the time to begin your learning.’ However, if both partners were on top of the family finances it would make divorce a lot easier.”—written by John Hoffman
Where to get help
Certified Divorce Financial Analysts usually charge between $175 and $250 per hour. “If people do their homework and bring in all the relevant financial information, we can usually get a fairly good handle on the situation in two hours,” says CDFA and author Debbie Hartzman. “For an individual, it usually takes no more than three hours overall. With couples it usually takes three sessions of an hour or an hour-and-a-half each.” She notes that a better understanding of your financial situation can save your lawyer’s time, which is much more expensive.
To find a CDFA, do a web search for your town and CDFA, or visit the website of the Institute for Divorce Financial Analysts (www.institutedfa.com) and search by city, town or area code.
Traversing the thorny issue of mortgages amidst divorce proceedings can prove to be problematic, and a Red Deer-based agent recently offered insights on how to handle the situation.
In a contribution for The Red Deer Express, Dominion Lending Centres – Regional Mortgage Group broker Jean-Guy Turcotte noted that it is possible to purchase a matrimonial home for up to 95 per cent of its value, should one desire to do so.
“[It] feels more like a refinance, but technically one spouse is buying out the other,” Turcotte explained. “The funds can be used to pay off the amount owing to your spouse and debts listed in the separation agreement – keep in mind not all lenders allow payouts and rules are changing on us all the time, so time can be of the essence.”
To qualify for the Spousal Buyout Program offered by banks, lenders, and mortgage insurers, the party who wants to purchase the matrimonial home should first complete a Legal Separation Agreement, “with the bare minimum that a lawyer provides each party with their own Independent Legal Advice (ILA).”
“[Both lawyers] do need to sign off to ensure that your rights are protected and to determine what liabilities are remaining from each other, if any (i.e., child support, alimony, etc.),” Turcotte said. “Ensure you talk about all the debts you jointly have so they can be separated appropriately and can be managed inside the separation agreement.”
An appraisal of the property’s value will also have to be conducted, as “[there] can be large value differences between what you think it’s worth and what it’s really worth.”
Creating a purchase agreement should follow, which can be done quite readily with the help of lawyers. Tapping the assistance of a mortgage professional to help with the other qualifying criteria would also benefit both parties as the process would be expedited.