Remember, 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 ?
Brief Lien Theory and Practice
When the Owelty Deed of Trust and the Special Warranty Deed with Encumbrance for Owelty of Partition are filed, a lien is placed against the property.
Part of the genius of any lien is that, for that property to transact in any way – by refinancing its debt with a new first lien mortgage or by conveying ownership interest to another party as in a sale – all liens must be satisfied. That is, they must be paid in full or must be resubordinated to a new lien in first position. [There are partial releases for instances like new construction but that does not concern us here.]
Since I finance so many of these Owelty liens immediately after final divorce, it could be easy to forget that many people do not finance them but leave them in place until a fixed or unknown date in the future.
- The divorce settlement may have required installment payments over time to the party whose interest is being bought out.
- There may be no payment scheme but a straightforward placement of the lien with the expectation that later, when the property sells, they will receive cash for their Owelty interest in the property.
Short “rabbit trail”
There are some issues with both scenarios. It’s clear from my work and my writings that I believe there are more advantages to immediately satisfying that Owelty lien rather than waiting until some point in the future to pay for it. But, there is no need to belabor the point herein – only to make it one more time.
Then, there is the hybrid. All sorts of variations of these two scenarios have been concocted and written into divorce decrees.
A common variation is when the departing party wishes to receive half of the proceeds (or some fixed percentage) in a future sale of the property and wants to secure it with an Owelty lien.
One way to accomplish that is to simply write in the decree what the net proceeds split will be, leave both parties on title (with neither conveying interest to the other – which means there can be no Owelty which requires conveyancing), those parties are the sellers in the transaction. This can create conflict since sellers must agree on terms of sale, etc. They got divorced for a reason. So, that’s generally not advisable.
Another way to accomplish that goal is for the departing party to convey his/her interest for Owelty but not set a dollar amount. This is likewise tricky and invites a lack of clarity. For one thing, an Owelty is a lien and it requires a dollar amount to satisfy it. Lenders can tell you to the day how much is owed on the debt (secured by a vendor’s lien). Daily interest accrues, and it must be paid or overpaid. I’ve seen people get fancy with this because they want two things – secure interest for the obtaining of dollars and the chance to take advantage of increasing values of the home they are leaving.
Clients may try to “work the system;” but, the more nuanced a buyout is, the more difficult it will be to determine dollar amounts at the time when dollars are needed.
Shortcut to smart divorcing and smart buyouts
DO THIS INSTEAD (when you can):
-Agree to a buyout price in the divorce.
-Talk to me about financing it -BEFORE final divorce.
-Follow my recommendation for structuring the Owelty lien.
-Close the loan.
———-And, I’ll take care of making sure lien is released.
Back to the Release of Lien.
When people do not immediately (or soon) finance and pay an ex-spouse for their Owelty interest but agree that payment will be made later, they often forget the technicalities of releasing liens. It’s really very simple. But, one had best leave it to the professionals.
Here’s what family law attorneys need to tell their clients who may be paying Owelty interest to an ex-spouse sometime in the future:
The person who pays or satisfies their ex-spouse’s Owelty interest must do TWO THINGS:
- Have their ex-spouse execute a Release of Lien
- Make sure that Release is precisely prepared, or it will not actually release the lien;
- Releasing the “note” is not the same as releasing the lien – it’s helpful to show that the note has been paid but that’s the mere evidence that authorizes a demand for release of lien; and,
- File that release in property records of the county in which the property is located (almost certainly the same county in whose courts the divorce was granted).
- A verbal promise from the ex that “everything is okay now” IS NOT A RELEASE OF LIEN.
- An ex-spouse’s signature on a receipt IS NOT A RELEASE OF LIEN.
- A form you found on line will not have the required information and IS NOT A RELEASE OF LIEN.
- A Quit Claim deed is useless in this regard and IS NOT A RELEASE OF LIEN.
If the Owelty lien is not released, when it comes time to sell the property or refinance it, that ex-spouse will have to be found and will have to release the lien. They could demand payment (again) and if the obligor cannot prove that they have paid, they would be “up the creek.” Even in the best of situations – and why would a divorced home owner count on the best of situations??? – it would be a bothersome exercise and could delay or even kill a transaction.