EP 146: How to Get a New Home After Divorce (Even with Bad Credit) - Interview with Max Townsend, Licensed Real Estate Agent

max-townsend-real-estate

"Many times people oversimplify what’s needed before they put the house on the market. There are all these little things that ultimately get caught by home inspection that will later turn into a negotiation that very rarely favors the seller. What I advise people to do is get a pre-inspection and have the home looked at by an inspector.” - Max Townsend

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

In this episode we interview Max Townsend, a licensed real estate agent in Texas. Max shares great details about how to sell your home during divorce, and he provides some key tips for moving on and getting a new place after divorce. Max covered a lot of ground we’ve never discussed before on the show — and some great advice most people don’t know about!

You’ll definitely want to listen to this episode. 

To learn more about Max Townsend, check out his great site at http://maxtownsend.com/. Be sure to sign up for his great newsletter! (Seriously — it’s great!)

This transcript has been edited for clarity.

Shawn: Today on the show we have Max Townsend. Max, welcome to the show.

Max: Mr. Leamon, thank you for having me Sir. 

Shawn: Max, why don’t you start by telling us who you are, what you do and where you operate? We’re in person if you can’t tell by the two great microphones in this interview. 

Max: I’m a licensed real estate agent in Texas. I work the northern Dallas suburbs, so that’s my primary purpose.

Shawn: As a real estate agent I’m sure you deal with people who are going through divorce or soon to be going through divorce, or at the tail end of the process and are moving on and looking for their next home. Is that right?

Max: Absolutely. Many times, they’re selling a home. Although sometimes it’s awarded to one side or the other, quite common for that person, even if they keep the home for a little while, to decide to sell it pretty quickly afterward. Many times there’s a sale as well as a purchase. A lot of different angles there. 

Shawn: Alright. So let’s get into some of those. Let’s start with the sale angle. For someone who is selling their house, what do they need to know, particularly if it’s a divorce situation. Let’s just say it’s a court ordered sale. Are there special considerations for people in that category or is it still a pretty similar process? Why don’t you get into that a little bit. 

Max: It’s a pretty similar process. Many times part of a divorce there’s some sort of value that’s put on the home. I think you want to, in your mind, think about something for that purpose, and as an agent to value the home so that whenever you are going to sell it, you’re not thinking of that other number. I think you want to get a very current recent number that relates to the value.

Shawn: Fair enough. So, that’s one of the things that we have to deal with all the time right? People have an unrealistic value of what their home is actually worth versus what it is worth in their head, which I’m sure you have to deal with all the time.

 Max: Absolutely, all the time. Obviously homes have a lot of variables and you just need somebody that’s used to understanding the value of those variables and comparing it to the neighborhood and everything else that comes into play to determine the ultimate value of the home, and what it will sell for on the market.

Shawn: For someone who is selling a house, a lot of times you might have been living in your house for ten, twenty, or thirty years. You know, the sales process is once in a lifetime or only a couple times in a lifetime process for most people. What are the key things that you see people not doing, that they should be doing to prepare their house for sale, particularly when divorce might be involved?

Max: I think it’s the same where divorce is involved or not, and it has to do with how the buyer of your home is going to look at it regardless of your circumstances. Many times people oversimplify what’s needed before they put the house on the market. There are all these little things that ultimately get caught by home inspection that will later turn into a negotiation that very rarely favors the seller. What I advise people to do is get a pre-inspection and have the home looked at by an inspector. It’s an optional thing and in some cases if the home is newly built, it’s possible they don’t have to do that step. I have seen that it just gives people a great sense of comfort, whenever they can just understand what’s going to come up or not come up. That pre-inspection is what reveals that.

Shawn: I have some cases now where a lot of times if you know you’re headed in the path of divorce, it’s normally not a one-day decision where you wake up and say you’re getting divorced. It could be two, five, or ten years or more before the timing is even right for this to happen, and the split to occur. One of the consequences of that is the house falls into slowly disrepair and there’s a lot of maintenance and work that needs to be done. You get to a point where you have a choice. That choice is how far do you go with the repairs. As a home seller do you just make minor repairs or should you renovate the house before selling it? I know there’s a lot of considerations in there. How would you guide someone to thinking about that?

Max: There’s a lot of different ways you can go with the answer on that. It really does depend on the situation. It not only depends on the emotional state of the people involved, and the divorce probably wouldn’t contribute to a renovation. It could, it just depends on who you’re trying to sell to, and what neighborhood you live in, and how it’s going to be best received in order to get the maximum value for the home. If you’re trying to get top dollar, that’s the sort of thing that comes up. These are questions that have to be asked and answered. If you’re trying to do something quickly and you know, there’s deferred maintenance on the home then I think that’s just to quantify the decision. If you do this, it’s going to result in x amount of return on investment.

There’s always someone to buy any home that’s out there. It just depends on who you’re going to try to sell to. There are a lot of even new companies out there that have popped up recently that will buy your home regardless of the condition it’s in, deferred maintenance or not. Just understand you’re paying a price for that. That’s okay in some cases where people just need the speed of cash or they need to eliminate the headache of repairs. There is a time and place for those options. A good agent is just going to lay all that out and say “here’s your buyer if you don’t do those things” or “here’s your buyer if you do these things” and “here’s what is appreciated in the neighborhood as a result of doing things or not doing things” because it’s all location. You have to understand the effect of doing something or not doing something as it relates to where that asset is. 

Shawn: Let’s shift gears a little bit and talk about finding a new place. There’s a few different roads I want to go down when we get into this subject. Let’s start with the first. You’re still married or still fresh in the divorce process and you want to move out or move on. One of two things come to mind, and I want to get into both. One is, you want to get a new apartment lease, and of course a credit check is involved in that. The other is buying a new home. I know you have a lot of experience with this. What do people have in their head versus what the reality is when they go and start looking fort these new homes of theirs?

 Max: Those are definitely situations that come up everyday. I’ll take the first one. Somebody getting divorced may be moving out of a house and into an apartment. Some of the challenges they may face would be many times they’re still on the mortgage of that old house. So there’s a liability that’s going to show up on their credit. It just depends on apartment, community and their under riding standards. Many times you can explain these things. I guess it depends on what their policy is. Many times an explanation can accompany an application, especially if there’s divorce decree that’s final, then it could just be a matter of someone falling through on a process to eliminate the other party from the debt, which could help their debt ratio. That’s what they’re going to look at many times. “Are we giving this person another liability on what appear to be a house payment?” That can create a double house payment situation from a debt ratio perspective, and that can be a challenge.

The other thing that can overcome a challenge like that would just be cash. Many times landlords or apartment rental companies may have a policy where if you’re paying a certain amount of money up front, or can prove you have a certain amount for money in reserves, then they realize they’re not exactly extending credit to you to the same degree as somebody who doesn’t have those reserves. That’s from an apartment perspective.

From a house perspective it’s probably a little stricter where if you’re going to buy a house, that lender is going to look at your credit and they’re going to want to see exactly what the situation is with the current liabilities in terms of if there’s a debt related to a house payment that may still exist. They’re not going to care about an explanation when it comes to that. They don’t care about the divorce decree saying that the other party is not responsible. Until that person eliminates that other party form that debt, which is different from the ownership. Yes, there may have been a grant deed or a quick claim issues to the other party that’s going to stay in the house. Until that party that stays in the house relieves the other person of the liability, the mortgage lender is going to look at that and say “We don’t care about the explanation. We just see a house payment here. Until that goes away, we’re going to count that.” We see this as you’re going to have two house payments. 

Shawn: Let’s get into that a little bit more. I’m in a situation, I’m married, divorce is final and so a part of the divorce process you say you’d sign a quick claim deed, for instance. Now, the house is no longer in my name but there is still a mortgage that has my name on it. Even though I’m no longer –at least as part of the decree –responsible for it, the lender doesn’t care?

Max: The lender doesn’t care. To take that thought further, if you were to call the lender that is servicing the loan on a house that you were responsible for with the original liability of that mortgage, but yet you now have been divorced and have a final divorce decree, and that divorce decree states that the other party has been given the ownership of the home. Normally that’s an exchange for a certain amount of money but that liability stays yours, as that party that’s released the ownership. So you have none of the ownership now, but you still are liable for the debt until that debt gets to zero or gets refinanced by the other party, or that asset gets sold which extinguishes the liability. That definitely is something that catches people by surprise. They think in their mind that the divorce decree settles it. It only settles the ownership part. There’s another piece to it, which is the liability. I would stress that people need to really talk to their divorce attorney about making sure that the party that’s going to get the house, release them from that liability by refinancing or selling that asset. It’s quite a burden for that person that no longer has the ownership, but is still on the liability, to walk around and try to solve their own problems whenever looks at their credit, looks at them as having probably more debt than they’re really, truly responsible for per that divorce decree.

Shawn: That debt could probably come back to hurt you later right? We had lunch yesterday and you had said something interesting about being in a negotiating position where the other person can do nothing and hurt you.

Max: If the other person decides not to make payments, or to make late payments, yes you’re going to have a juicy explanation letter than you can write that could reference a divorce decree and you can think in your head that it’s not right. The truth is, it’s going to be on the credit report, and it’s going to affect credit scores and decisions that get made sometimes without you even being asked to provide an explanation letter. It’s best to try to avoid that future situation by having the liability extinguished either by selling the asset or by the party that’s awarded the asset, refinancing it into their name only. I would stress that person and that position, ask the divorce attorney to make that a condition to happen within a certain amount of time.

Shawn: It sounds like what a lot of people don’t think about is, as long as your name is on that liability, whatever it is –in this case we’re talking about mortgages –any liability, it can come back to hurt you if you don’t have control over it. It’s not always instantaneous. It could be a year, two, or five down the line and all of a sudden your ex spouse starts missing payments, delaying payments, or making late payments, and you’re the one who had a credit score impacted by those types of things.  

 Max: Not only that. Shawn, you know this better than I do. You could probably speak to this with greater depth that I can but it would seem to me like the word divorce should mean separate completely. If you still have your debts comingled, even though the divorce decree states that a certain person has been awarded this or that or the other, these credit institutions that are granted the credit when you were married, before you got divorced, they don’t care that you’re now divorced. They know both names are still on it. If you call them up, they’re not going to take one name off because the divorce decree says so. They don’t care. So they’re going to keep both names on that liability, and it just seems to be counter productive to the whole word divorce, because you still have a dotted line of space in your head which relates to, “did that other party make the payment this month? Or did they not?” and that still occupies a little bit of space in your head, which you probably want to let go of, per the word divorce. Let go and move on. Unless you get these liabilities untangled, they’re going to occupy a little bit of space in your head.

Never negotiate with somebody who can hurt you by doing nothing. That’s what a person, especially somebody who may have a grudge against you now or may have some reason to want to try to spite you or whatever. It’s just a bad recipe for causing you harm with them deciding not to make a payment or do this to try to get back at you or hurt you. By all means, talk to your divorce attorney and make sure the liability side is untangled in a reasonable amount of time, or ask the question; what happens if the other party doesn’t untangle the liability? I’m giving up the ownership but I’m retaining the liability. How do we untangle the liability side?

Shawn: That makes a lot of sense. Stay on the bad credit path for a little bit. A little bit of a different context. Let’s say your credit through the divorce process, or just through life itself, finances are complicated and things happen and you’re divorced now, and your credit is not the best. How do you move on? What are your best options in that position? It would cover two scenarios; one is when it comes to finding an apartment. You had mentioned something about cash can help, and then the other is, if you wanted to get a real house and have a similar space and similar lifestyle to what you had before, maybe have kids or whatever else, what are your options in that regard? 

Max: Yeah, absolutely. The common denominator in any of those situations would be first, to know what you look like on paper so that you can play offence instead of defense on this whole credit thing. I would use a mortgage loan officer that you trust, and ask them to pull your credit, and tell you what their opinion is of your credit worthiness as it relates to the third option you mentioned; buying a house. That could also help you even if you were going to get an apartment. Once you know what your challenge might be on paper you can play offense and address it ahead of time. What any decision maker is going to want to look for in an explanation letter as it relates to credit is, “what happened?”, “what did you do about it?” and “why is it not going to happen again?”; those three things. That’s the magic formula for an explanation letter. The mortgage loan person would be able to tell you whether or not it’s going to work, as it relates to buying a house. There are a lot of programs that work with overcoming credit, and then there’s just a matter of how much skin in the game is there, and all that sort of thing. So it depends on how much money down and those sorts of factors. The other thing will come into play too is debt ratio. The other thing we spend a lot of time on as it relates to the liability side of a house that may or not be your ownership still. Whether I was going to go get an apartment or a house, I would want to know what my situation looks like on paper. I would use a mortgage loan officer to help me in that respect. They’ll be happy to help you whether you’re going forward with the house or not, just for the opportunity. I would proactively put together an explanation letter if I were going to walk into an apartment complex and I knew there was something that would be viewed derogatory. I would put that explanation letter together and I would attach it to my application, and it would just say “On this specific trade line to this specific creditor, here’s what happened. Here’s what I did about it. Here’s why it’s not going to happen again.”

Like I mentioned earlier, sometimes these decisions are made without you given the opportunity to know there’s a problem. That’s just another negotiation 101 thing which is play offense and not defense. 

Shawn: I want to dig in to this negotiation letter just a little bit more because it’s something we’ve never talked about on the show, and I’m not super familiar with. How long, especially when we’re talking about divorce situation, I feel like that explanation could encompass a book for most people. Of course someone who is writing alone or extending you credit for an apartment or perhaps a new house isn’t going to want to read a book. How long is an average explanation letter? How does someone find some good templates and start thinking about crafting one?

Max: You know what Shawn, it’s even easier than that. What it is, is the straight up truth. That’s all you have to say. How you say it doesn’t really matter. You need to understand, decision makers and underwriters an apartment complex, people the make these decisions, they’re people. The underlying thing there is, they are people. I think you just say the truth and you use those three things; what happened? what do I do about it? why is it not going to happen again? Put those three things in a paragraph and if you need to go to further details as it relates to what was going on around the situation that caused it, let your heart be your guide, but ultimately just write it as though you were on the other side of the desk and that is a person that’s going to read it. Just tell the story and be honest and transparent. 

Shawn: You said one other thing to me. Sometimes the divorce process, often times can bankrupt you or get close to it where you’re significantly depleted and your financial resources. Maybe you don’t have a down payment for a house. Are there other options? What are your other options? Renting, and I think you had mentioned some newer options to me as well that people might want to think about. 

Max: If your challenge is having cash to make it work, and credit is not your problem, let’s say your credit is just fine, then yes, there are ways you can buy a house with very little money out of your pocket. Again, I’m going to refer to your trusted loan officer to find out those answers, but there are. For example, here in Texas there’s a state program where they have money set aside to fill that gap that somebody may have for a down payment. That specific program is called SETH. There’s a SETH program, there’s FHA program that allows money for down payment to come from a gift. Many times these programs can work in conjunction with your seller, whether that seller might be a new home builder or just a regular seller where there’s credit that comes from the other side to close a gap fro closing costs or down payment, and USDA loans, which are more geographic in nature but don’t have a down payment to begin with, 100% financing. So there’s a lot of different options but they are very dependent upon your situation and where you’re buying the house, and a mortgage lender really needs to be the one to answer those questions. I just want to tell you that there are programs out there.

There’s another one too. I know of an investor specifically who is in the business of helping people by opening up the market. For example, let’s say they’re recently divorced and they’re used to living in a house with their kids and rooms for their kids. Let’s say it’s a big house or whatever, it doesn’t matter. They want to maintain that same standard of living. There are investors out there and what they will do is say “Here’s what we’ll do. You find the house and we’ll buy it for you, and rent it to you.” In many cases they’ll give you the option to buy it at the end of the first year, second year, or third year. There can even be different numbers for each of those time frames because the home is appreciating and stuff like that. The problem that overcomes is many times people will be looking out there for homes for rent, and let’s just say there’s a not a wide selection, there’s not a lot of opportunity, it’s not in the right neighborhood, they want to keep their kids in the same school. There’s a lot of different factors that come up. If that market was opened up to any house with a sign in the yard as an option, that’s where these people can fill that gap, where if you don’t have a situation that works right now, today, to buy the house, they can buy it and rent it to you. They’re basically creating inventory out of homes that are for sale and turning those into rentals, and they’re giving people an option to buy. So there’s companies in the business of doing that too.

Shawn: Max, that’s a lot of great information. Thanks for coming on the show. Where can people find out more about you?

Max: Best place to find out about me is the website: maxtownsend.com

Shawn: Maxtownsend.com. Well Max, thank you for coming on the show today.

Max: Thank you Sir! Appreciate it. 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for personalized coaching services. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.