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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.

  1. 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.
  2. 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.
  3. 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.

  1. First and foremost, the note must be salable. There are many technicalities that can render such a note unsalable or less valuable.

  2. The note must be made payable to you followed by “or order” or “or bearer”

  3. 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 financing."

    ·        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.

  4. 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 date

    ·        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 Valued

  5. 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.

  6. Due on Sale Clause - should be in the note. It states that should the house be sold the note must be paid in full.

  7. Power of Sale Clause - should be in the note and deed of trust / mortgage, especially if your state allows non-judicial foreclosure (like CA).

  8. All parties who are listed on the new deed to the property must be listed on the note and deed of trust / mortgage.

  9. The deed of trust / mortgage must be notarized and recorded promptly along with the deed, in order to properly secure the note.

  10. 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.

  11. Hazard/Fire Insurance - The insurance policy should be updated to list the note holder, as the loss payee on the policy.

  12. 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 attorney.

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 note.

-James MacArthur

JMAC Funding
PO Box 91472, San Diego, CA  92169
(619) 846-1550 voice
(815) 572-5600 fax
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Licensed by the California Department of Real Estate, DRE# 01440161