Owelty Documents Tool Kit #4 – The Owelty Real Estate Lien Note

Here are the Tools in the Owelty Documents Tool Kit

The Divorce Decree
The Owelty Deed of Trust
The Special Warranty Deed with Encumbrance for Owelty of Partition
The Owelty Real Estate Lien Note
The Release of Owelty Lien
The Proceeds Allocation Letter
The Check Written to You 😊

Here’s my theory – totally based on experience not science or even research – about the Owelty Note (or the Owelty Real Estate Lien Note). Back in the day (the exact calendar date depends on how old you are but I’m thinking sometime before I came along in 2002 with my Divorce-Lending Specialty) divorcing parties for the most part agreed to buyouts in amounts which often were not readily liquid for cash payment. The parties might agree, for example, on a $50,000 buyout but the “buyer” did not have $50,000 or if they did, it was committed elsewhere (retirement, emergency, life savings, etc.). And – here’s the kicker – hardly anyone knew how to properly finance these buyouts.

To complicate matters, equity financing (as we know it) was not possible in Texas before 1998, the same year that the Owelty lien was provided as a valid lien on a homestead property in the Texas Constitution. So, there was some confusion and a lot more ignorance about exactly how these Owelty liens might be financed. It was assumed, therefore, that if a paying party did not have the cash and the receiving party did not want to wait for payment, an installment payment schedule had to be created.

This sentiment is expressed in the following discussion question written by an attorney many years ago in his lesson on Owelty liens:

“H and W acquire homestead while married. At the time of the divorce, it is worth $300k and is free and clear. W wants to keep the house, and H is willing to let her have it. W currently has no money to buy H’s $150k share but expects to have the money in about two years. H is willing to wait that long for his money but wants security for the obligation. Accordingly, the court awards the property to W, divests H, and grants H an owelty lien for $150k.
What is the problem here?”

Of course, don’t get me started on the problems which would have to include the question of who knows if and how the wife might pay in the future…it is, after all, supremely important that these pieces of white paper get turned into actual green money?

But, for our purposes in discussing the real estate lien note, do you see the common assumption that wife cannot borrow the money in a refinance transaction. Only since H is willing to wait is there not some demand for the money in lump sum or at least in installment payments over an acceptably short period of time.

I think that the widespread belief was that Owelty liens were for the security to create an installment payment schedule first and foremost (when cash funds were not available). Hardly anyone financed them, knew that they could be financed or knew how to structure such financing without triggering the new Texas Home Equity restrictions and legal provisions – which, if you remember, scared scores of lenders which promptly ceased doing business in Texas and gradually trickled back in.

I developed this theory several years ago when I noticed more than one template language Owelty provision which began with the creation of the Lien Note. It was as if, the note was anticipated, established and then, the Owelty of Partition lien grew out of that.

Be that as it may, the Owelty Real Estate Lien Note is not necessary in establishing or perfecting the Owelty lien. It has nothing to do with the existential nature of the Owelty. It is not required in partitioning the property or defining one-half undivided interest. It is merely the repayment scheme to which parties may agree. The Owelty interest can be created without a lien note.

Such note may, in fact, be created in a divorce settlement. And, if it is, then the lender and title company will want the Owelty Real Estate Lien Note to be filed of record.

Here’s the process from our perspective. We ask the title company if the decree or any executed (or to be executed) document like the Owelty Deed of Trust or the Special Warranty Deed with Encumbrance for Owelty of Partition cites a Real Estate Lien Note. If it does, we know that the title company will require its recording. Otherwise, it is a superfluous document and not required in our closings. So, if there is no clear demand for an installment repayment schedule, we save the customer money by not requiring the note to be created, executed or filed.

Takeaway: If the parties do not wish to create a repayment schedule between them, there is no reason to create a Real Estate Lien Note. Now, it’s true that there should probably be some agreement as to how and when the Owelty will be paid. But, an installment repayment schedule is but one of those methods.

Here are other payment options:

  1. Owelty is paid only when property sells at some indefinite point in the future.
  2. Owelty is paid by a date certain…or house is sold, debtor is forced to list property under prescribed terms.
  3. Owelty is paid by a date certain…or other party is awarded the house subject to certain agreed terms.

The best reason to include the Owelty Real Estate Lien Note is to put “teeth” into the requirement that the payer follow through with a requirement for lump sum payment by a certain date. And, to really put “teeth” into the requirement, make the repayment terms as onerous as possible – high monthly payments at the highest possible interest rate. If a homeowner is looking down the barrel of a $1500/month payment on a $4,000/month income, they will be incentivized not to goof off with their 60 day window (or whatever time frame). It’s a human nature thing.

I suggest that, if the parties want it or need it, the Owelty Real Estate Lien Note be established as a back-up plan, an installment payment plan if lump sum payment is not made by a certain time as in a homeowner who does not follow through with me to re/finance the house debt and include full payment of an Owelty buyout.

But, an installment payment is no longer the assumed solution to buyout out an ex-spouse’s interest – CALLING ME TO FIND OUT HOW TO FINANCE IT IS THE FIRST ORDER OF BUSINESS.

It’s become a joke I know but it’s true – there are only 10 digits you need to know for all your divorce-home-financing questions:

972-724-2881

That will solve all your problems. “Guaranteed not to rip, tear, snare or bare or bag at the knees.”  😊

Thanks for reading.

Noel Cookman
noel@themortgageinstitute.com

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