One of the things young lawyers are taught when they begin to practice is that law school offers no training in how to manage client expectations. When clients search for lawyers they typically do so expecting justice and to get what they “deserve.” Sometimes those expectations are reasonable but in fields like real estate and divorce it can be tough.

Managing expectations is hard enough when the markets are normal. Today’s real estate market is anything but that as I am learning in a transaction where the house must be sold.

In my matter, I have a very nicely built townhouse in a planned community of about 60 homes that is 30 years old; 2,500 square feet backing up onto a deep forest. The master bed/bath and closets take the entire second floor. It’s a lovely place.

When I first became involved a like property 200 feet away sold for $450,000. That was 10 months ago. My property is now ready to go to market so I did what I expect any reasonable buyer to do; which is measure it against what Zillow, Redfin and say the place should be worth. The answer was shocking. The average of the three was $550,000; $100,000 more than the 10 month old comp and $200,000 more than the house next door sold for three years ago.

We all know what happened to residential real estate during the pandemic. Prices that had remained somewhat stable throughout the period from 2010 to 2020 rose vastly, especially in the lower-middle market of $300-500,000. My client had acquired her townhome in 2011 for $330,000. Her next door neighbor still got in for $360,000 in 2021. What makes this all the more odd is that from 2010 to April 2022 mortgage rates never got above 5%. In January 2021 they dipped to 2.65%. Alas, all low rate parties must end and this one emptied out quickly after Spring 2022 when mortgage rates rose first to 5% and then peaked six months later at 7.8%. A doubling of rates does dent the housing market and today we are still just a hair above 7%. Yet, the algorithm devised by our friends in the real estate market say the house I am selling should command $80,000 more than the neighbor got 10 months earlier when interest rates were essentially the same ((7.23% in August;7.09% now).

This is a divorce attorney’s nightmare. Assume the house I am selling belongs to a couple going through divorce. It has a 4.5% mortgage from 2011. So, we like the mortgage as a re-fi at today’s rates would be 35% more expensive than that great 2011 rate. Now the couple has to figure out what the house is worth and which spouse will keep it. In an effort to save $500 or more on an appraisal, the clients look on line and see that the house down the street sold last year for $450,000. By any definition that’s a reasonable comp. But then the spouse who is ready to depart the house and that luscious 4.5% mortgage looks at Redfin and with their “average” value of $562,000. Even under the best of circumstances the response of the spouse selling his/her interest is: “Hold it; I’m walking away from a low interest mortgage which I don’t know I can ever replace AND ANOTHER $100,000 IN EQUITY. NO WAY!”

The parties could hire the appraiser to try to solve this. But now put yourself in those shoes. The comp down the street is a good comp at $450,000. This writer has also looked around and found another comp within a mile that sold in April 2024 for $470,000. The second comp is not quite as nice but it’s another townhouse a mile away with the same square footage. So, the appraiser might feel OK adjusting upward to $470,000 or maybe even $490,000. But he’s probably not going to find data that will allow him to reach $500,000 and if he did it can sometimes be shaky. For example, 11 miles up the road from the “subject house” is a new townhouse development of similar size houses that are pulling in $700,000 and up. The algorithm may be capturing those house sales and that is what inflates the value of our “subject house” by $50-70,000. The appraiser won’t know because he doesn’t get to see the algorithm written by Mr. Redfin or Mr. Zillow. And appraisers are not going to “walk the plank” by opining that a house around Philadelphia increased in value by 20% in ten months without being able to give a VERY detailed explanation for how that could happen.

Back at “Subject House” an otherwise uncontested divorce has turned nasty because only one party can keep the 4.5% mortgage and it appears that party might also be “stealing” a $550,000 home for under $500,000. Now, no one is moving. Our couple could sell the place and see what actually happens but a sale means kissing that 4.5% mortgage goodbye.  

Again, the goal should always be realistic expectations. But there are times when the outside data gums up the “facts” and because we don’t know how Refin, Realtor and Zillow reached their conclusions, their conclusions make compromise seem foolish.