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Written by
Noel Cookman

Q&A #3: How Do you Split Out Encumbered Property in a Settlement?

Published On 
November 6, 2017


One of Texas’s finest attorneys in McKinney called to ask about how one of his clients could sell part of a 100 acre tract of land to his soon-to-be ex-spouse. Client’s wife was to receive 16 acres unencumbered. But, there was a mortgage on the entire 100 acres. How does such a transaction get “split out” or “split up?”

If wife was to be awarded the entire 100 acres then the mortgage financing would stay in tact – it encumbers the entire 100 acres. (It could be either refinanced by wife or kept as is, depending on the agreement. Of course, I nearly always advise that the debt which goes with awarded property be refinanced OUT of the granting party’s liability…but, that’s another Q&A).

But, that’s not the case. So, I had the idea but checked it out with my trusty title agent, Robert Salgado. Sure ‘nuf….



I just spoke with my title agent. It’s the same as if the owners were selling 16 of their 100 acres to a third party while still owing something on the mortgage balance. Let’s say the bank had financed 100% of the land (they don’t do that but for illustration purposes), that it was worth $1,000 per acre (separate from the house and its one acre). And, let’s say they still owed $100,000 on the 100 acres. They want to sell 16 acres, the bank would say “pay us $16,000, and we’ll release that 16 acres from the lien…it’s a partial release of lien.” Then, the bank would be holding a note for $84,000 on 84 acres – the same position they have now.

It’s basically what we discussed – the bank tells the owner(s) how much they want – if anything – to release that 16 acres. You’ve already done the work. Now, husband just goes to the bank and asks “what would it take to release this surveyed 16 acres?”

So, if the property is worth $100,000 and they only owe $50,000, the bank would calculate $50,000 against 84 acres (acreage remaining from the 16 acre carve out). It’s now worth $84,000 (in theory) and there is a $50,000 encumbrance. That’s a 60% LTV (Loan to Value) ratio. So long as the bank was good with 60%, they wouldn’t have a problem releasing that 16 acres without any additional payment. I think the only problem would be if the bank’s max position were 80% and the existing loan were close to or at that percentage, any reduction in collateral acreage would cause the bank to calculate a payoff so that their remaining position would be at or below 80%.

Hope that makes sense. Short story – ask the bank what it would take to release that 16 acres. Let them do the calculation.



One more thing – this is really important. For answers to questions and issues like this one, the fool-proof way to get the exact answer is to have your client call me and let me “do the deal.” I realize that clients do not always need financing. But, more often than not, they benefit from properly financing awarded properties. I don’t have time or space to fully explain. But, I know you probably take my word for it. If there’s every a question – do not hesitate to call me…or, just tell your client “CALL NOEL.”



Thank you, Sir. As always, I appreciate you walking me through this.

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