DIVORCE LIENS ON THE FAMILY
HOME
by Lorelei Stevens, President
Wall Street Brokers, Inc.
Copyright ©
2004 All Rights Reserved
This
is written for WA State, but 95% is applicable to all states
If you are
getting a divorce, or know someone who is getting a divorce, you will find it
helpful to know about divorce liens.
A divorce lien
can avoid the usual turmoil of selling the house and splitting the money - the
home often being a divorcing couple's largest single asset.
With a divorce
lien, one party keeps the house and the other gets a note and deed of trust (or
mortgage) secured by the property. One gets real estate and the other gets
paper.
In this
arrangement, the spouse who keeps the home, often the wife,
has the same familiar environment for herself and the children. The children
don't have to change schools. There are no divorce relocation costs. She
retains a fair share of the equity and hope that the price of the home goes up.
She has the obligation to pay the departing spouse according to an agreed-upon
schedule.
The departing
spouse, often the husband, signs a deed to the house over to the wife, and in
return gets a note and a deed of trust secured by the home - a divorce lien.
The departing spouse can hold the note until it pays off, or he can sell it for
cash. If the departing spouse has no need for immediate cash, he can accept a
payoff, in many cases in about five years, or when the youngest child is
eighteen. If the departing spouse does need immediate cash, he can sell the
note and ordinarily receive tax-free money. This provides funding for new
living quarters, help in paying attorney fees, child support, and a new start
in life. If he sells the note, this financial connection to the house ends.
This win-win
scenario can ease the pain of a divorce to some small degree. However, a
divorce lien is not for every case. The divorcing couple's situation must meet
some guidelines. First, the family must have substantial equity in their home.
Second, the spouse who retains the home must be able to afford property
maintenance and the payments on the first mortgage - a divorce lien is usually
a second mortgage. Since a divorce lien also requires a certain minimum of
cooperation between the divorcing spouses, you will recognize at the outset
that some divorcing couples may not agree to this approach. When it is
possible, it gives benefits to both parties that would not otherwise be
available.
How to
Create a Divorce Lien
You need
specialized knowledge in order to structure a divorce lien properly. Both
parties need to understand these basics.
A divorce lien
is based upon a deed, a note and a deed of trust (or mortgage). The departing
spouse deeds the property over to the remaining spouse, who continues to live
in the house. The remaining spouse signs a note payable to the order of the
departing spouse and gives a deed of trust secured by the property. This
arrangement, if properly structured, will result in a note, which is a valuable
asset that can be sold for cash.
First and
foremost, the note must be salable and both spouses must be informed that the
note is intended to be a valuable asset that can be sold for cash. Once
everybody understands that fundamental fact, attention can be focused on how to
make sure the note is actually salable. There are many technicalities that can
render such a note unsalable or less valuable.
The proper
procedure to assure the note's salability begins with the departing spouse - we
will assume it is the husband in this discussion - conveying title to the property
by signing a deed to the remaining spouse - the wife. The husband and wife must
provide all documents required by law to get the deed recorded. This could
include affidavits, excise tax forms, or other required items, depending upon
the laws of the State in which the family home is located.
While this deed
is being prepared for recording, simultaneously a note and deed of trust will
be prepared for the wife to sign in favor of the husband. Special care must be
exercised in preparing the note, because its salability depends on these
crucial factors.
Salability
The first thing
is the husband should be warned that the original note that he will receive
must be kept in a safe place in his possession. If it is lost, stolen or
destroyed, a copy will not suffice. He will not be able to sell it. Even if he
does not want to sell the note, not having it in his possession may hinder his
ability to enforce his rights.
In preparing
the actual language of the note, it should be a negotiable instrument whenever possible.
The first rule
of negotiability is that the note must include a time certain when the note is
due. A time certain is an exact date, such as
The next rule
of negotiability is that the note must be written so that it is not governed by
or subject to any other agreements, terms, conditions or events. In a divorce
situation, it is a common practice to write the note governed by or subject to
the dissolution agreement. If the note is written subject to or governed by any
other document, it will make the note non-negotiable.
It is
particularly important to avoid making the note subject to claims,
modifications, or offsets of the wife. The most common problems include making
the note subject to the future performance of the husband, such as allowing the
wife to collect any unpaid child support from the balance due on the note.
Another common problem is to give the wife first right of refusal to buy the
note at a discount if the husband wants to sell it. If the note is written
subject to any claims, modifications or offsets, the note will not be a
negotiable instrument and will have little or no cash value.
If a specific
case requires creation of a non-negotiable instrument, the note will most
likely be unsalable, but in some circumstances may
still be salable for a much lower amount.
Money
You should also
know how to create a note that can bring the highest cash price. Keep in mind
these three principles based on the time value of money: A note is worth more
if 1) it has monthly payments instead of just one lump sum; 2) it has a short
term to the payoff date; and 3) it has a high interest rate.
If the wife can
afford to make monthly payments on the note rather than one large balloon payment
at the end of its term, the note will bring a higher price. However, most
divorce lien notes do not have monthly payments because the wife's financial
situation does not allow it.
If the note can
be created with a term of no more than five years, it will bring a higher cash
price than one with a longer term.
The higher the
interest rate on the note, the higher the cash price will be. A note with no
interest may fulfill the divorce settlement, but it will result in a deep
discount in the event the note must be sold. At the other end of the range, the
highest legal interest rate may prove to be more than the wife can actually pay
off when the house sells - the interest could eat up all of her equity so that
the sale price of the house could not cover the balance due on a high-interest
divorce lien note. Thus, the best interest rate for top value is the highest
practical rate, taking into consideration the economic realities of the case.
If the note
extends beyond a one-year time period without any payment, it must specify
exactly how the interest is to be calculated, either simple or compounded
annually. Simple interest is calculated on the original amount of the note,
whereas annually compounded interest adds interest to the principal balance
each year, so that the previous year's interest becomes part of the next year's
principal - earning interest on interest. Failure to specify the interest
calculation method will result in a note buyer basing the note's value on
simple interest, which will lower the cash price.
Wrap-up
When the
documents are complete and signed, the deed is recorded first, then the deed of
trust. The note is given to the departing spouse.
This is the
time for each of the two parties to buy title insurance. The wife should get an
owner's policy and the husband a mortgagee's policy. They usually don't want to
pay this expense, but it is a vital protection for each of them. Divorces
routinely make couples secretive about financial matters, and a title insurance
policy will make sure that neither of them has conveyed or encumbered the
property without the knowledge of the other.
The fire
insurance on the house needs to be changed at this time, making the wife the
insured and the husband the mortgagee. This usually doesn't cost any money.
It's a good
idea to contact the first lien holder to which both husband and wife are
obligated to pay. The husband can request that he be released from liability.
The first lien holder is not likely to do so, however, unless the wife can
qualify financially to pay the payments without the income of the husband.
Sometimes, the first lien holder will agree to do so after payments from the
wife have been promptly received for a certain amount of time - for example, two
years. The wife should sign permission for the husband to have access to
information about the first lien mortgage until the divorce lien is paid off.
Clearly, a
divorce lien is an excellent solution to the emotionally and financially
draining problem of property settlement.
Divorce liens
can be created on other assets besides the family home. For example, investment
properties and businesses can be divided in a similar manner.
Of course, it
is imperative that attorneys for both the husband and wife review the creation
of the divorce lien, to ensure the house is deeded properly and the lien is
structured properly.
This
information was prepared by Lorelei Stevens, President of Wall Street Brokers,
Inc. They are experts in privately held real estate and business notes,
including divorce liens.
The information
is summarized from over 31 years of experience. It will prove invaluable to
individuals and professionals involved in structuring a divorce lien.
Assignments
1.
Make sure you
have family law/divorce attorneys in your Professional Database
2.
Create a letter
of introduction to family law attorneys
3.
Visit Lorelei
Stevens Website http://www.wallstreetbrokers.com/homelien.htm
4.
Visit www.divorceliens.com for more information
5.
Download the printout Lorelei has
approved.