Tips for Creating Divorce Notes
and Dividing Real Assets
In many divorce settlements the largest asset is the home,
and dividing it can be troublesome; however, several options exist.
- Sell the home - divide the assets. Better in
cases of little equity in the property or if neither spouse wants or can
afford the property.
- One party keeps the home, Refinance debt to pay other
party. Requires that the spouse keeping the house can actually afford the
house payments and has good credit.
- One party keeps the home, Other party takes back a
mortgage. May be a more palatable solution than Option 1, assuming there is
enough equity in the home, and the spouse who keeps the house, can afford the
payments. Usually much quicker and cheaper to implement than Option 2. Also
requires a certain level of cooperation between the parties.
The remainder of this article pertains to Option 3.
In this case one of the parties will leave the settlement with debt instrument
(note and mortgage or note and deed of trust), instead of a cash. It may be
desirable for that party to have cash instead of a note, either at the time of
settlement or some time down the road. Especially if levels of cooperation
between the parties deteriorate. If properly prepared, divorce settlement
notes can easily be sold for cash. Here are some tips:
You need specialized knowledge in order to
structure a note and deed of trust properly. Use standard forms, and have your
attorney(s) prepare the docs or at least have them reviewed by an attorney. If properly structured,
it will result in a note which is a valuable asset that can be sold for cash.
First and foremost, the note must
be salable. There are many technicalities that can render such a
note unsalable or less valuable.
The note must be made payable to
you followed by “or order” or “or bearer”
Negotiable instrument -
In preparing the actual language of the
note, it should be a “negotiable instrument” whenever possible, otherwise it
will have little or no value.
The first rule of negotiability is
that the note must include an exact date when the note is due (such as December
31, 2007). Not an event such as "when the house sells," or "upon better
The next rule of negotiability is
that the note must be written so that it is not governed by or subject to any
other agreements, terms, conditions or events. In a divorce situation, it is a
common practice to write the note governed by or subject to the dissolution
agreement. If the note is written subject to or governed by any other document,
it will make the note non-negotiable.
It is particularly important to
avoid making the note subject to claims, modifications, or offsets of the wife.
The most common problems include to give the borrower first right of refusal to
buy the note at a discount if the note owner wants to sell it. If the note is
written subject to any claims, modifications or offsets, the note will not be a
negotiable instrument and will have little or no cash value.
If a specific case requires
creation of a non-negotiable instrument, the note will most likely be unsalable,
but in some circumstances may still be salable, but for a much lower price.
Terms of the Note
You should also know how to create a note that can bring the highest cash
price. Keep in mind these three principles based on the time value of money: A
note is worth more if:
It has monthly payments instead
of just one lump sum (balloon)
It has a short term to the payoff
It has a high interest rate
If the note can be
created with a term of no more than five years, it will typically bring a higher
cash price than one with a longer term.
See also: How a Note is
It is also more valuable if it has
a late payment penalty, to discourage late payments and/or if it has a
prepayment penalty to discourage early payoff. A prepayment penalty is most
useful if the interest rate is higher than normal.
Due on Sale Clause -
should be in the note. It states that should the house be sold the note must be
paid in full.
Power of Sale Clause -
should be in the note and deed of trust / mortgage, especially if your state
allows non-judicial foreclosure (like CA).
All parties who
are listed on
the new deed to the property must be listed on the note and deed of trust /
The deed of trust / mortgage must
be notarized and recorded promptly along with
the deed, in order to properly secure the note.
Title Insurance -
Both parties should get a title insurance policy, one a home owners policy, the
other party a lenders policy. This is an added expense, but it is a vital protection for each party,
and makes selling the note easier.
Hazard/Fire Insurance -
The insurance policy should be updated to list the note holder, as the loss payee on the policy.
Of course, it is imperative that
the creation of a note should be reviewed by an attorney, to ensure the house is
deeded properly and the loan is structured properly.
This information can be useful to:
Husbands, Wives, Home Sellers, Divorce Attorneys,
Accountants, Financial Advisors, Real Estate Agents, Business Brokers.
I am not an attorney, laws vary from state to
state, and any legal advice implied by this paper should be checked with an
About the Author:
I am a real estate broker licensed in the
State of California as well as an investor of real estate and debt instruments.
We buy real estate notes and real estate contracts nationwide and make private
and hard money loans on real estate in California.
I hope you find this information useful, feel
free to contact me with any feedback, or if you are contemplating selling your
PO Box 91472, San Diego, CA 92169
(619) 846-1550 voice
(815) 572-5600 fax
©Copyright 2006 JMAC Funding
Licensed by the California Department of Real Estate, DRE# 01440161