The Owelty Lien in a Co-Heir Buyout

DID YOU KNOW THE OWELTY LIEN CAN ALSO BE CREATED FOR A CO-HEIR BUYOUT?

Pass this on to your probate and estate planning attorney friends. For that matter, get this information to anyone who is or is going to be an heir of a family homestead.

Even though the Owelty lien is most often thought of in relationship to a divorce-related buyout, the actual nature of an Owelty lien is broader than just a divorce buyout.

It’s understandable that we would think of Owelty as almost entirely related to divorce. The Texas Constitution’s only attempt at defining an Owelty lien relates to divorce…

Under Article 16

Sec. 50.  PROTECTION OF HOMESTEAD FROM FORCED OR UNAUTHORIZED SALE; EXCEPTIONS; REQUIREMENTS FOR MORTGAGE LOANS AND OTHER OBLIGATIONS SECURED BY HOMESTEAD.  (a)  The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

(1)  the purchase money thereof, or a part of such purchase money;

(2)  the taxes due thereon;

(3)  an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding; [etc.]

It is left to title insurers to then differentiate between that which is Owelty interest and that which must fall under some other category such as “cash out” (also called “equity”).

But, the most concise definition of Owelty interest that I have found is:

The difference which is paid or secured by one coparcener to another, for the purpose of equalizing a partition. 

You already know how it works in a divorce. One party buys out the other by receiving their “undivided one half interest” in the property in exchange for an agreed price.

It works the same way when co-heirs agree that one (or more) of the “co’s” is going to buy out the other parties (i.e. co-owners). It’s usually one of the siblings or co-heirs who wants the house and needs to get financing in order to buyout his or her co-heirs.

But, here’s the problem in practice – hardly anyone knows how to structure the financing. Almost every lender is structuring it as a “cash out.” In fact, just as in divorce…

IT’S NOT A CASH OUT

IT’S A BUYOUT!

As in divorce, if the buyout is properly structured, the borrower gets a better deal, they avoid the “cash out” traps and limitations; and, they can use VA or FHA financing if necessary (if they qualify) rather than being limited to conventional financing.

The title company has no control over the type of financing the borrower is getting. So, if the lender sends them a Texas Home Equity Cash Out loan, the title agent doesn’t say “Oh, by the way, did you know that there is a superior way to do this.” And, even if they did, my experience tells me that so few lenders would know their head from a hole in the ground when it comes to Owelties in general or Owelties in the particular case of a co-heir buyout.

The title companies and attorneys tell me that no one is using the Owelty – that they are all using “cash out” financing.

Such a shame.

So fixable. So easy.

All they have to do is call me. We handle the creation of the Owelty documents, conveyancing of interest, loan underwriting, closing and funding. To me, it’s simple. It all starts with a proper understanding of what an Owelty lien is.