Owelty Documents Tool Kit #6 - The Proceeds Allocation Letter

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 ?

I shall discuss the last two documents – The Proceeds Allocation Letter and the check written to you. For that last one, see my example toward the end of the article.

This is the MAGIC that makes so much happen in financing. It’s THE mechanism that “turns white paper into green money.”

The Proceeds Allocation Letter is unique to me – at least in its use in divorce. It is not in your software or a book of templated forms. I created it in conjunction with a title guru to accommodate special financing arrangements that, so far as I know, only we allow.

It’s magic. It has allowed up to one half of my customers to get a home loan. *Those divorced homeowners who would otherwise not qualify for a mortgage loan are able to qualify AND finance their home, most of the time lowering their overall budget expenses significantly by using our industry unique methods and by specifying this arrangement in this magical document.

The guiding “tool” is the Proceeds Allocation Letter. This makes it all happen.

But, first, please read this and heed it. Or, you may negotiate your client OUT of their ability to get a mortgage.

In mediation or in any negotiation in which terms are set forth in writing, when negotiating a buyout:

1. Do NOT use the word Owelty. Save that for the decree.
2. Use the term “net buyout” when negotiating…well, when negotiating the net buyout of the departing party.
3. If you must use the word Owelty in an MSA or other similar document, use the following phrase and you will save your clients innumerable difficulties: Net buyout to spouse shall be $X; final buyout or Total Owelty to be determined by lender in consultation with the borrower.”

When the MSA fixes the Owelty as a dollar amount, it becomes difficult or impossible to change it. It shouldn’t be but it is.

Most importantly, as I design the financing, I must often recommend that the Owelty be set at a certain amount and that, out of those Owelty proceeds specific debts must be paid, always giving the agreed net buyout amount to the “selling” party.

Example:

Net Buyout to Spouse                                        $50,000.00

But, I recommend…

Final Owelty Amount to be cited in decree    $75,000.00

with a….
Disbursement (Proceeds Allocation Letter)

Ex Spouse                                                           $50,000.00
Misc. Debt                                                           $20,000.00
Attorney (Remaining Fees)                              $  5,000.00
Total Disbursement                                          $75,000.00

Spouse gets their $50,000. What should they care about the rest, their ex is borrowing the money and having to repay it. Why should they care if it’s a million dollars? If I say this is how it must be in order to get the $50,000 to them, so long as it’s legal, why should the recipient care how it ends up in their bank account?

A word to those who think that IRREVOCABLE means UNCHANGEABLE.

I’ve been told by lawyers who have allowed “owelty” to be written into their MSA’s that there is nothing that can be done to adjust the amount; and, some have said that the judge is a stickler for conformity to the MSA; so, not a word can change.

Here are the facts:

1. Parties can change whatever they agree to change. (But, you already knew that). Obviously, this change only works in very amicable cases or at least in cases where two parties are working toward a common goal. More on that in a moment.
2. As to a judge’s insistence on following precise wording in the MSA – so long as parties come to terms on some legal agreement, the judge would be ill-advised to insist on something else – a judge, after all, will not insist on the parties finalizing their divorce if they decide to reconcile. But, because it’s easier to barbecue the whole hog than make sausage, just keep to the wording I gave you and you will be okay.

What if the MSA has an Owelty provision written in it? Well, it depends on the exact language. Here’s one case I had:

I recommended a different Owelty amount than the net buyout agreed by parties - $48,000 with net disbursement to ex-spouse of $40,000 instead of just $40,000. Both parties were willing to change the Owelty amount but the attorneys choked on it. The MSA, they argued, was clear – an Owelty of $40,000 had been established. Besides the fact that an MSA does not create an Owelty – it can only agree that an Owelty will be created – the actual language in the MSA read like this:

“…$40,000 to be secure by an Owelty lien...”

Now, had the language been

“…$40,000 to be secured by an Owelty lien of $40,000…” they might have a point – the Owelty is set at $40,000 and one cannot change it to $48,000.

Whereas, in the first rendering (which was actually in the example MSA), a $40,000 buyout can absolutely be secured by an Owelty lien of any amount at or above $40,000. A $48,000 Owelty lien secures a net buyout to ex-spouse of $40,000…

…And, the instrument that disburses those funds is the Proceeds Allocation Letter.

The Proceeds Allocation Letter is a seller’s (seller of an Owelty interest so to speak or the seller of a property to a new buyer) instruction to the title agent to disburse the proceeds in a particular manner.

If, for example, you sell your house, the title agent will ask how you want your money delivered. The simplest disbursement of your funds is for you to receive a check or wire transfer. If you want the money wired to your account, you will give the title agent some kind of directions, probably in writing now – “please wire my funds to My Name, Account No. 1234567 at ABC Bank, Routing No. 000-000-000.

Now, if your proceeds are $100,000 and you wish, for any reason, to send that money any number of different destinations, you will need to provide the title company with directions and instructions.

That’s what a Proceeds Allocation Letter is. It says “please send my money to the following persons/entities.”

In a divorce buyout, the word “my” is the operative idea. It is the fact that the Owelty funds ARE the selling party’s funds (in the above example, the entire $75,000) that is the magic of using Owelty buyouts to fund any number of needs, even the debts otherwise assigned to the borrower.
The protection which the borrower (grantor of the Owelty Deed of Trust) has and needs – that their ex-spouse will not abscond with the entire amount without disbursing it properly – is the Proceeds Allocation Letter.

My example of a Proceeds Allocation Letter is introduced and explained with an example in the following footnote to an above sentence.

*For numbers people, you may be wondering how and why a special construction of the Owelty Lien – larger than the net buyout to spouse -  makes THE difference in whether or not a homeowner can get financing. Here’s an example:

Property Value                                      $100,000
Current Mortgage                                $  50,000
Net Buyout to Spouse                         $  25,000
Closing Costs                                       $    5,000
New Loan Needed                               $  80,000 (80% LTV ratio)

New payment will be

P&I                           $450
Taxes                       $200
Insurance               $100
Total                       $750

Borrower’s Income          $2,000/month

House payment yields a 37.500% debt ratio (750/2,000).

So far so good.
But, borrower’s debts are
Item                      Monthly Payment       Balance
Car Payment            $150                        $  5,000
Credit Card               $100                        $  2,500
Legal Fees                < ? >                         $  2,500
Total other needs   $250                         $10,000

Now, his total debt service is payments are $1,000/month or 50% debt ratio (1,000/2,000). Too high to qualify for a loan (the actual max debt ratio is not a universally established number. But, let me work a little magic.

I recommend that the Owelty Lien be established at $35,000 not $25,000 and that the following disbursement be made:

Spouse                                               $25,000
Car Loan                                            $  5,000
Credit Card                                        $  2,500
Attorney                                             $  2,500

One might ask “why can’t the borrower just ‘take out’ an equity loan or borrow the cash they need to pay their debts?”

Simple: By law, they can’t. At least, no lender can lend them money secured by their homestead dwelling at a loan amount greater than 80% of their home’s value. This means that $.01 or more going to something other than the Owelty lien is considered “cash to borrower” and the 80% limit is triggered. Obviously, in this example, there is no more cash available in loan funds – the 80% threshold has been reached.

So, the borrower’s new loan looks like this

New payment
P&I                           $525
Taxes                      $200
Insurance               $100
Total                       $825

The borrower’s debt ratio is 41.500%, well within the acceptable range. Plus, the newly divorced borrower is only paying $825/month in debt service rather than $1,000/month. This is helpful to newly divorced homeowners. This is in the best interest of everyone including society at large and the children in specific, not to mention the borrower.

We just closed a transaction whereby the borrower – through our unique design of the Owelty buyout – saved over $1,800/month in debt payments.

You want happy clients? Help them save real dollars in their monthly budget.