Beware Of Phantom Equity

Cindy Best

I received an email from Chris Carter Kent, a Real Estate Special Commissioner, and I thought it was important to share. Below is the email she wrote and you can visit here site here for more information. 

 

“It’s SCARY to Use Equity as a Bank Account in Divorce!

Will An Over-Valued Home Come Back to Haunt Your Client?

 

A Real-Life Horror Story:

Home Listed (6 months pre-decree): $4,800,000

Home Sold (1.5 years post-decree): $3,500,000

Loan payoff: $3,000,000

Expected Equity: $1,800,000

Realized Equity: $500,000

Phantom Equity: $1,300,000

This is an extreme, but true example of the monstrous price reductions that we regularly see with luxury homes. Regardless of the price of the home, the list price is rarely the final sales price. The scourge of Phantom Equity is alive in all price ranges. It’s spooky to think that clients are “banking” on Phantom Equity to finance their future.

The Problem: In fear of their financial future, sellers/divorce clients may over-value their home. They want the most money out of the house, need to offset the cost of the divorce, and have funds to start their new life. Some even plan on paying their attorney fees out of the equity. That’s a scary thought!

The nightmare begins when the home sells, post-decree, for far less than the value at the time of the decree. There are numerous dreadful scenarios that can emerge. For example, what if an equitable offset cannot be fulfilled? Was the phantom equity considered when determining spousal maintenance?

The Solution: Use a realistic price range for the home (not an appraisal or Zillow value). Ask a divorce savvy Realtor for a best case, and a worst-case scenario. Perhaps use the worst-case scenario when preparing the case. Then, be pleasantly surprised if realized equity is higher than anticipated.

Pricing the home to sell pre-decree is the ultimate safety net. There are skeletons in the closet that are not often discussed when determining price. They include pricing history and days on market for comparable homes sold. These numbers can be a foreshadowing of a forlorn future for an overpriced home.

You hold the skeleton key to your client’s future by paying close attention to these issues, and help prevent them from becoming victims of Phantom Equity!”

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