Owelty Documents Tool Kit #3 – The Special Warranty Deed with Encumbrance for Owelty of Partition

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 ?

Short names for the Special Warranty Deed with Encumbrance for Owelty of Partition:

-Warranty Deed (when, in context, the transaction is contemplating an Owelty)
-Owelty Deed (can be confusing since the Deed of Trust is properly called an Owelty Deed of Trust)
-my favorite, the abbreviation SWD w/Owelty (which I shall use herein)

I italicize the names of the various documents (deeds, notes, releases) which accompany or establish the Owelty in a divorce action

I shall discuss the nature of the SWD w/Owelty and compare it to the Owelty Deed of Trust. Understand the difference – and that they are a mirror of the other – will help to clarify what its function is.

The Special Warranty Deed with Encumbrance for Owelty of Partition does two main things:

1. Transfer: It conveys interest from one party to the other in a real property.
2. Dollars: It encumbers that conveyancing with (makes it conditional upon) payment of dollars for said interest. Hence, it’s function as a lien.

Essential Elements in the Special Warranty Deed with Encumbrance for Owelty of Partition:

• Name and address of grantor (person granting the interest and being divested of all ownership in the property in a divorce action)
• Name and address of grantee (person receiving the interest and being awarded the property in a divorce action)
• Legal Description of property
• Dollar amount for Owelty interest
• Signature
• Date (signature date – not before final divorce)
• Effective Date (best to be filled in by title agent)

NOTE: The grantor and grantee are reversed from what appears in the Owelty Deed of Trust. In the Owelty Deed of Trust, the grantor is pledging the property as the collateral for payment of the Owelty amount and declaring that the grantee’s interest is in the property and of a certain dollar amount. In the SWD w/Owelty the grantor is giving up their interest in the property and granting it to the grantee so that the grantee has 100% ownership of (interest in) the property.

Likewise, the beneficiary of the Owelty Deed of Trust is the party which is to receive Owelty funds. But, since the SWD w/Owelty conveys (or transfers) interest in the property, the beneficiary of that real property award is the party which pays Owelty funds but receives the real property. In both documents, the beneficiary is the grantee – receiver of either funds (in the Owelty Deed of Trust) or real property interest/ownership (in the Special Warranty Deed with Encumbrance for Owelty of Partition – I just felt I should spell it out in full that time).

Moreover, some title theory posits that the Owelty Deed of Trust is not absolutely necessary so long as:

1. The Decree clearly establishes the Owelty
2. The Special Warranty Deed with Encumbrance for Owelty of Partition is executed and filed (at the appropriate time)
3. The Owelty Deed of Trust is not cited in the divorce decree or the Special Warranty Deed with Encumbrance for Owelty of Partition.

But, the Special Warranty Deed with Encumbrance for Owelty of Partition is virtually always necessary in the creation and financing of the Owelty buyout.

Here is one critical – and revealing – reason why the Special Warranty Deed with Encumbrance for Owelty of Partition is always necessary: An Owelty cannot be paid to any person who still has interest in the property – it would not, then, be an Owelty loan or payment for Owelty interest. If (borrowed) mortgage money is paid to a person who still has interest in the property, that mortgage is a Texas Home Equity mortgage (triggered when any “owner” or person on title or person with an interest in the homestead – a.k.a. primary residence – receives “cash” in the mortgage transaction).

An Owelty is only payable to a person who used to have interest in the property but is now “selling” that interest and is being divested of that interest. Irrespective of the legal theory and practice of partitioning property during a marriage, for all practical purposes, neither can a Special Warranty Deed with Encumbrance for Owelty of Partition be in force before the marriage is dissolved. Only upon final divorce can an Owelty be in force.

Confirming as Separate Property is another issue. And, I will deal with that later. For now, I am dealing only with property which has the presumption of being community property. (I must deal with a few different issues in relation to community property, separate property and Owelty interest; namely, that Owelty interest is in homestead properties according to the Texas Constitution, making community property interest a superfluous consideration although a consequential one).

For now, the key is that only final divorce can authorize the granting of property interest (Owelty interest); thus, the Special Warranty Deed with Encumbrance for Owelty of Partition is a moot document/filing until after final divorce.

Here’s what is not required in a Special Warranty Deed with Encumbrance for Owelty of Partition.

• Citation of any underlying, existing or prior mortgages (deeds of trust) or loans on the property.

The most common mistake I see in the drafting of Owelty Deeds of Trust and Special Warranty Deed with Encumbrance for Owelty of Partition is the citation of a debt other than the Owelty debt.

The Owelty instrument is not for requiring payment of any debt other than that which is created between the parties for one of the parties’ interest in said property.

Think of the Owelty as a separate debt and consideration. It’s roughly comparable to a pool installer who files a mechanic’s lien (has to be done before work begins) per the home owners’ signature on a Mechanic’s Lien and Contract which establishes ONLY the debt for the pool. Now, the wise pool installer will do some diligence to make sure the property will not be upside-down with the new pool debt or, at least, regardless of the value:debt ratio, the homeowner will pay the debt forthwith. But, the pool installer does not deal with any other liens on the house – he understands that he is in secondary or worse position in terms of lien holding.

Practical Stuff

Who prepares the Owelty documents?

Most attorneys I speak with don’t care much for preparing the documents. It seems that there is not clear guidance in the forms or software. Since family law attorneys don’t want to incur extra costs on behalf of their clients – by hiring a real estate lawyer to prepare them – they generally suffer their way through them.

But, here’s the dealio. Title companies must give a thumbs up on these documents anyway; so, they are reviewing them – AND ON SOME OCCASSIONS IN THE CASE OF A LOAN CLOSING, preparing their own set of Owelty docs (DOT, SWD w/Owelty, Release) anyway.

You just don’t know it because the borrower can sign the Owelty Deed of Trust at closing and the beneficiary of the Owelty funds can sign the Special Warranty Deed with Encumbrance for Owelty of Partition and the Release of Owelty Lien at the time they receive their funds – it’s an exchange.

So, if you don’t care to prepare these, just let the title company prepare them anyway. I am speaking of a situation wherein there is a loan to be closed. And, I am assuming that I am transacting that deal – only then can we be sure the deeds are prepared, executed, filed and – most importantly – FUNDED in the proper manner. From my experience, the cost of preparing them is pretty reasonable. At the time of this posting (March 2018), here is one title companies schedule of fees:

Owelty Deed of Trust w/ Note                                                                           $200
Special Warranty Deed with Encumbrance for Owelty of Partition             $150
Release of Owelty Lien                                                                                        $ 75

The title company’s attorney only needs the Final Decree of Divorce in order to prepare these documents. (Remember, I will have previewed the final decree to make sure everything is workable – including the proper creation of the Owelty).

So, here’s a case – ESPECIALLY WHEN YOU AND YOUR CLIENTS ARE WORKING WITH ME – wherein, you don’t worry about these matters. You can off-load them to me. You concentrate on getting them divorced. I’ll make sure all the real estate financing issues are perfect.

Thanks for reading.

Any questions can be directed to [email protected] and I’m still able to take your phone calls – go ahead and call me at 972-724-2881.