What If You Finalize Divorce Before Knowing the Buyout Amount?

Great Question from one of Texas's finest family law attorneys.

Hello Noel,

I am working on a proposed Agreed Final Decree and am hoping you can help me with some language.

The goal is for Husband to remain in the home and refinance the home to remove Wife's name from mortgage. Wife also needs to receive 1/2 of the equity at the time of refinance. Wife wants the equity to be determined by the appraisal that is done as part of the refinance process. I assume that I cannot then do an Owelty since there is not an exact amount.

Is there form language that you suggest for this type of arrangement?

Thank you!
Attorney

Dear Attorney,

So good to hear from you.

First of all – CONGRATULATIONS for knowing what so many lawyers and judges and mediators do not know:

that the only appraisal that matters is the one ordered by the lender as part of the loan process.

You are in the TOP 1%! I’m serious.

You can actually do what I typically recommend that you NOT do – that is, specify the Owelty as “half the equity.”

This, then, creates the need for the parties to work together in a reasonable fashion after their divorce and arrive at that dollar amount. That is why I do not recommend it…typically.

But, it’s more important that the buyout be specified as an Owelty than it is to, perhaps, not even specify it that way and the borrower be stuck with Texas Home Equity (cash out) restrictions. And, it will encumber the property with that Owelty interest even if the Owelty is not “perfected” in deeds that get filed. The title examiner in a future transaction will read the divorce decree. I recommend filing the decree in property records IF there is no action on paying wife very soon after final divorce.

So, as close as you can get to a workable formula, the less chance there is of contention or dispute or misunderstanding post divorce.

I have an opinion about formulas that I believe is reasonable and defensible. It is based on what I have termed “accessible equity” rather than “raw equity.” It’s not perfect but it’s understandable and fair (or so it seems).

Look at this attached spreadsheet > EquityDeterminationWorksheet You will see that the equity in the case of a typical sale (when sales price and appraised value are the same) is very close to the equity as determined by my 95% “accessible equity” formula. I use the 95% method because conventional financing will not finance any higher than 95% of a home’s value/price. One must make at least a 5% down payment in a purchase or finance no more than 95% LTV ratio in a refinance.  I highlighted the two formulas in yellow.

Now, here’s the punchline – and it is more than shameless commercialization on my part. It will absolutely provide protections for everyone and solid information about actually “turning that white paper into green money.”

Have the husband call me…immediately. And let me structure the loan. If he hustles, we can have appraisal ordered by the end of business today. As well, I can preliminarily “design” the loan with suggested buyout options. No need to bore you with details just yet. But, there are two main reason to do this if you can –

#1. I get more business – I’m not stopping until we close more loans than anybody in history. It’s true – I’m a shameless capitalist. And, all I try to do is work with divorcing folks on their financing. So, I've carved out a very special niche and stuck with it for 17+ years. You'll see - the need is HUGE! And, candidly, it's a crusade with me at this point.

But, what is the benefit from your and the parties’ perspective?

#2. You will KNOW exactly how much the appraised value is before final divorce (assuming you weren’t going to finalize in the next 5 business days) and everyone will KNOW that the loan can close, when it will close and when wife will receive her money.

That's my story - I'm stickin' with it. Thanks for writing. I appreciate you.

Noel Cookman