When a couple comes in and starts the mediation session by telling me that this is going to be the easiest mediation I’ve ever done, right away, I get a little nervous. That’s usually a signal that they have issues that they think have been resolved, but maybe not.
They first talk about what they have already agreed to:
“We are dividing the equity in the house.”
“Well, that’s great. How are you doing that? ”
So the husband explains:
“We are selling the house and after we pay the mortgage off and the closing expenses, $100,000 of equity will be left. My wife put down $25,000 when she bought the house that was her separate property from the sale of a previous property before the marriage. She used that $25,000 as a down payment, which I think she is definitely entitled to get back. So this is what we are going to do: out of the $100,000 of equity, she is going to take her $25,000 out which will leave $75,000 for us to divide.”
It’s time for a visual on this deal. I make two columns on the whiteboard and show the division of equity as they just explained it. I put the $25,000 in the wife’s column. I then divide the $75,000 equally by putting $37,500 in the husband’s column and $37,500 in the wife’s column. By dividing the $100,000 of equity in the house, according to their method, the wife ends up with $62,500 and the husband ends up with $37,500.
“See, we did all the hard work so there is nothing for you to do.”
“Well, that is very interesting, but let me apply the magic of math and see if I come up with a different number, using the same premise.”
If the wife is going to get $25,000 back from a separate property down payment, you don’t do it in the front end, but do it in the back end, and here’s why. There is $100,000 of equity. By dividing it in half, the wife gets $50,000 and the husband gets $50,000. Now she had a separate property down payment of $25,000, so from the husband’s share of $50,000 we now take $25,000 and give it to the wife. Now the wife has $75,000 and the husband has $25,000 which is not what they figured.
What just happened here? By taking it off the front end, the wife only ends up with $62,500 and the husband ends up with $37,500 so there is a discrepancy of $12,500.
Did the magician just make the elephant disappear? And why is that? If you are dividing the equity in the house equally, 50% of each dollar of the $100,000 belongs to the wife, and 50% belongs to the husband. When you take a separate property down payment off the front end of the agreement, the person who made the down payment is really only getting 50% of each dollar. If you take it off the back end, they get 100%.
Don’t be a victim of the “magic of math.” You don’t have to do it all yourself. Use an experienced mediator to ensure a fair and equitable division of assets during the divorce process.