Can An Owelty Secure Payment When Property is Jointly Held and Sold?

So this attorney calls and asks…

No, this is not a joke. It’s just one of many calls or emails I receive each month. I’ve designed my business model so that I can take care of your questions and *conundrums. I can do this because you have been so kind in the past many years to refer your clients to me for financing. It’s one thing to theorize about how mortgage guidelines are affected by divorce settlements. It’s quite another to “turn white paper into green money;” that is, actually close and fund transactions that

  • Pay off ex-spouses for their interest in a marital residence
  • Get ex-spouses off the mortgage note
  • Qualify and close loans for moms dependent on child and/or spousal support
  • Close loans for purchases before final divorce
  • …and lots more…

Back to the question:

Q: Can I secure a divorced client’s interest in a home with an Owelty lien, such home to be sold and proceeds split per a formula (like 50/50 or whatever)?

A: The answer isn’t yes or no. It’s actually “Don’t try this at home. Call me.” In other words, a solution can be formulated once I determine what the parties are trying to accomplish and what either of them might want to accomplish in the future.

Let me answer the question by outlining ways that you can protect the grantor client’s interest in the home.

  1. Do not award the property to either party but provide for the sale of it with a splitting of the net proceeds. This requires both parties to remain as co-owners and agree on terms of sale. That doesn’t work for everyone; and, obviously, there is some level of rationality and common sense that is required from both parties in such a business transaction. I’ll leave that right there. Only to say that, I don’t think it’s usually important to define what net proceeds are with some formula – the parties determine that figure by the terms of their contract and the payoff of their existing indebtedness on the property. You might specify how the net proceeds are to be disbursed or used (as in the payment of certain debts before the splitting of proceeds, etc.). But, the parties to the sales contract determine the exact dollars of net proceeds. Title companies make that calculation straightforwardly.
  1. Award the house to one party subject to an Owelty lien (with dollar amount), provide for its sale or payment of Owelty within a particular time frame – and get ready to enforce. But, again, how does either party or either attorney know if such a transaction can occur? Is everyone guessing at this point? Hoping? Assuming?  There are two options in this scenario. First the house sells at a price whereby everyone is paid what they have agreed. Secondly, the house does not sell but is refinanced by the grantee at terms which satisfy most of these settlements, that the grantor is relieved of the mortgage debt and paid his/her Owelty proceeds
  1. Provide that the house be sold (and proceeds split) by the owners (both parties) and that if the house not sell, the house be awarded to one party and an Owelty be attached. The Owelty could specify a formula or percentage. This flies in the face of everything I’ve taught about Owelties, that it must be defined as a dollar amount. And, it’s true, before the Owelty is consummated (financed), the parties have to agree to a dollar amount. I dislike this scenario very much for a few reasons. As just mentioned, a dollar amount has to be agreed by two parties who divorced each other. It can happen but who would ever count on it and design an agreement whereby it had to happen? It’s kind of like some people at the beach who unadvisedly wear bikinis or thongs. Just because one can doesn’t mean they should.  I’ve seen things I cannot unsee – God help me! Another reason I do not like it is because virtually all situations can be resolved by using scenario 1 or 2.

Short answer: So long as ownership is retained by both parties, the Owelty lien cannot be used to secure interest.

Here’s why. If both parties retain joint ownership in a property in anticipation of a sale and splitting of the proceeds (different from splitting or sharing equity) then one main feature of Owelties is missing – the simultaneous act of conveyancing & divestiture. Owelty liens are in force only as the grantor conveys his/her interest and divests themselves of ownership (interest). That is, Owelties are not payable to owners.

Was this helpful? What other questions do you have? Email me at noel@themortgageinstitute.com and I’ll answer your divorce-finance related questions.

Noel Cookman
817-454-4555
noel@themortgageinstitute.com

*yes, I am aware that there is an alternative spelling for the plural of conundrum; that being “conundra” which is greeted, I might add, with a squiggly red line under it because Bill Gates does not approve of this Latinized rendition. I direct your attention to

https://www.theguardian.com/notesandqueries/query/0,5753,-5253,00.html so that you might see that there is no little debate about such spelling. For now, I shall not throw tantra about the whole sordid affair but I just might call a series of colloquia or at least some symposia to settle the matter.

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