Strategic divorce: “No you stay in the house for now, I insist”

By the time most divorcing couples get to an attorney, most have already decided who gets to stay in the house until the divorce is over.  However, especially in light of the somewhat strange real estate environment, divorcing couples should think strategically upon exit.

The Law

To simplify a little, two landmark cases are used in nearly every divorce case in California.  They are Watts¹ and Epstein².  In Watts, the court determined that a spouse who uses community property after the date of separation owes the other spouse a fee for such use.  So, Watts charges are a fee on the use of marital property; whichever spouse retains the most significant property during their divorce will probably be hit with the most Watts charges.  Meanwhile, in Epstein the court held that a spouse who pays community debts after separation is owed a credit.  So, Epstein credits are a reimbursement charged against one spouse to the benefit of the other who paid a community debt. However, Epstein credits will not apply in certain situations, like if the spouse makes the payments for the debt out a shared bank account.  Interestingly, there was a strange period between Epstein in 1979 and Watts in 1985 when the law of California granted reimbursement for payment of community debt, but not for use of community property.

The Real Estate Environment

The recession has had incredible impacts on the real estate market.  Appraised values have dropped considerably, home sales are down, and renting has increased.  One of the results of the revamped rental market is that mortgage payments and rental fees, which should be somewhat similar, are sometimes quite different.  Traditionally, annual rental cost should equate to around 7% of the appraised value of a property.  So, if you have a $400,000 home, the estimated monthly rent would be around $2,200.  But, as a result of the housing downturn rental values have increased and have especially shot up in higher end homes.  Take for example this high end home in Camarillo with an estimate mortgage of $6,900/month and an estimated rental value of $11,523/month.  Although an extreme example, there can be great variance between rental and mortgage payments, especially on higher-value properties.

The Strategy

Before moving out of the family home, or making agreements about who will stay, make sure to do some research or call a real estate agent to determine what the approximate rental value of the property is.  If there is a great disparity between the numbers, you may want to live under the same roof to avoid Watts charges.  The typical (and stereotypical) pattern is that wives want to stay in the family home and kick the husband out.  This may not be in her best interest.  Even if she pays for the mortgage, if the rental value of the property is more than the mortgage, she will still owe the difference between the rental value of the home after separation and the mortgage payments she made post separation.  To make things even more complicated, separating couples can sign a temporary settlement agreement characterizing either mortgage payments or staying in the home during the divorce proceedings as support.  In this case, no Watts charges or Epstein credits are given since this is support.  If this seems somewhat complicated, that’s because it is; and it’s best to consult an attorney.  Besides getting an attorney, it turns out the best thing to do may be to pack a suitcase and get a hotel room.  It may be cheaper than the Watts charges you could accrue.

1. In re Marriage of Watts (1985) 171 Cal.App.3d 366, 378.
2. In re Marriage of Epstein (1979) 24 Cal.3d 76.