*DRAHOS UPDATE SEPTEMBER 2022*
In September 2022, the Drahos Calculation was updated by the Arizona Supreme Court.
The Court considered whether the Drahos calculation should remain as the standard in Arizona for determining the value of one spouse’s sole and separate house. The Arizona Supreme Court vacated both Court of Appeals opinions for Saba and Femiano. We, therefore, now have a clearer picture of what happens when the community pays the down payment, the mortgage payments, and all other payments: In that situation, the Court still applies Drahos unless another approach would yield a fairer result.
The Arizona Supreme Court approved the Drahos formula and installed it as the “starting point” for calculating the equitable lien. But where appropriate, the Court can consider other formulas or calculations. The ultimate aim of the Court is to “achieve substantial justice” between the parties.
Original Post Published 2021:
One of the biggest financial risks people take during a marriage is done unwittingly—and sometimes even unknowingly—financing the marital home in the one spouse’s name alone. During the marriage, it may make sense; but it isn’t without risk. Below is a brief overview of how Disclaimer Deeds are handled during a divorce and how the court calculates how much is spouse is owed.
What is a Disclaimer Deed?
A disclaimer deed is a document that waives ownership interest in a property, most commonly, the marital home.
Purpose of a Disclaimer Deed
When financing a home in only one spouse’s name, the lending company requires a Disclaimer Deed from the other spouse. This Deed means that only the financing spouse owns the home because they agreed to the mortgage contract.
Lack of understanding is not a defense.
Many people sign the Disclaimer Deed without understanding what it means. Unfortunately, that doesn’t matter. They are legally binding documents and if you signed it, you agreed to give up your claim to the property.
Dividing a house in a divorce with a signed Disclaimer Deed
Just because there is a Disclaimer Deed, it doesn’t mean that one spouse gets to keep 100% of the house. Because after signing the Disclaimer Deed, community funds were likely used to pay the mortgage and/or make improvements on the home. And because divorce courts are “courts of equity”; meaning, they try to do what is fair, the courts created a concept called a “community lien.”
What is a “Community Lien”?
A “community lien” is when community funds (or other efforts, including labor) are used to improve or pay for an asset (like a house). The money, efforts, and labor spent on the property benefited both spouses, not just the spouse who owns the home. And since it benefitted both spouses, it should be divided equitably during divorce.
Drahos Calculation – How the court calculates the value of a community lien
As of December 2021, the Drahos Calculation is being reviewed by the Arizona Supreme Court. For now, the Court uses what is called the Drahos calculation. It is an imperfect formula designed to account for the contribution of both spouses to the property.
Community Lien = Contributions (mortgage payments, labor, improvements) + (Contributions/Purchase Price) x Appreciation.
Essentially, it requires the property-owning spouse to pay the other spouse half the mortgage and improvement contributions plus a portion of the appreciation
Example of how Drahos works
This example is a simplification for illustrative purposes only. There are many other factors that can be considered.
If during marriage, one spouse purchased a home, and the other spouse signed a Disclaimer Deed and:
- Home Purchase Price: $400k
- Mortgage Payments to Principal: $100k
- Appreciation: $200k
The calculation would look like this: $100k + [($100k/$400k) x $200k = $150k
The community interest is $150k. Both spouses are entitled to half of the community interest.
That means, the spouse who signed the disclaimer deed will receive $75k in equity for the house.
What happens if the community paid everything?
That’s a good question because, again, as of this writing, that question is in front of the Arizona Supreme Court because the Arizona Court of Appeals split on this.
In one case, Femiano v. Maust, the Arizona Court of Appeals divided all of it 50-50. In the other case, Saba v. Khoury, another panel at the Court of Appeals wrote that it disagreed with the Femiano ruling because a disclaimer deed must have meaning; otherwise, the party taking out the financing is taking all the risk.
Be careful when signing a Disclaimer Deed to property during marriage. It may make sense at the time, but it could cost you significant money down the road. We will keep you updated when the Drahos ruling is made by the Arizona Supreme Court.