What if a potential buyer is interested in acquiring a part of your property, and you’re willing to sell?
If you’re a land owner with full rights in a piece of property, you may legally sell any part of it — unless bound by an agreement to the contrary. If a parcel is mortgaged, an owner may not subdivide parts to sell, thereby shrinking the loan collateral, without the lender’s approval. A homeowner who attempts to sell mortgaged property without the lender’s permission invites the risk of triggering the loan’s “due on sale” clause and having to pay off the full mortgage.
Thus, to transfer title to a part of a property, the owner must first receive a partial release of mortgage. This instrument allows the sale of a section of a property, free and clear, yet keeps the mortgage on the remainder.
How does the partial release process play out? In this article, we boil it down to a few key elements. We also offer some contextual questions to consider. By examining the context of a potential sale, a potential seller can avoid serious losses in value.
Can It Be Done? Check the Rules.
Before having any serious discussions with a potential buyer, be sure the sale and release is possible. Ask two threshold questions:
- First, there’s the matter of local zoning. The homeowner should carry out some preliminary online research to ascertain the minimum lot size required for a home. A sale cannot legally occur if it cuts the parcel’s size below the allowed minimum in the local area.
- The next threshold question is whether the lender can consider a partial release. Some mortgage agreements expressly bar partial releases. Others may refer to a set release schedule, requiring the borrower to have a certain amount of equity built up before requesting any type of release.
Assuming zoning ordinances would permit the deal, the owner or the owner’s mortgage consultant should call the lender, and explain the prospective buyer’s proposal. If partial satisfaction of the mortgage agreement can be accepted, the lender will give the borrower an established procedure to follow. To preserve the loan-to-value ratio of its collateral, the lender might call for a partial loan payoff, or might allow a partial discharge in exchange for payment out of the homeowner’s current equity. Much depends on just how much the sale would change the value of the asset to be retained under the mortgage.
Clearly, there are many moving parts to this process. And the borrower must complete the application exactly the way the lender needs it submitted in order to obtain the partial release. Expect the approval to take several weeks or months before the buyer and seller can realistically approach the closing table. Any agreement the homeowner negotiates with a buyer must be contingent on the receipt of the partial release of mortgage.
Reality Check: You Have a Buyer. Should You Sell?
Before getting into the nuts and bolts of the legal instrument, let’s take a step back. A proposal to buy a part of a property demands some tough questions and smart answers.
For a few examples:
- What will happen with the sold segment of your property when it’s no longer yours? Will it be developed? Will the changes mean more noise, traffic, pollution, parking, impermeable ground surfaces, problematic water diversion, or bulky infrastructure on the edge of your property?
- Could you lose valuable resources, such as water or trees, to the buyer?
- Will the buyer remove natural features that give your land privacy and beauty?
- Do you know the real value of what you’ll be conveying? You might have no interest in the development potential of your land, but that value is still there and should be paid for.
An appraiser with knowledge about subdividing properties can complete some due diligence on the “best use” value of the segment you want to sell. Expect to pay at least $1,000 when hiring an expert for a complicated appraisal task — and that’s in addition to subdivision fees and survey costs.
Real estate agents, too, can weigh in on the fair market value of a given segment of property. They can point out new angles a seller hadn’t considered. For example, should the seller get a stake in the development, if the buyer is planning to use the land in a business? For support in achieving a fair agreement, the seller should consider the importance of hiring a local real estate attorney, too. An experienced and diligent legal expert makes sure that the partial release and the new titling are correctly done, and that owners know their rights, risks and obligations.
Laying the Groundwork for a Partial Release
If the lender is willing to approve the partial release, several wheels start to move:
- The title insurer runs a title search to scour the records for liens.
- The title insurer adds an endorsement to the title policy, and the lender receives copies of the updated policy.
- The lender requests an appraisal of the current property, and its expected valuation once the segment in question is removed from the title.
- A licensed surveyor examines the property and prepares the new legal descriptions.
- The owner contacts the county zoning office for permission to subdivide; and the zoning office reviews the survey, appraisal, and related information.
The owner should obtain all the necessary instructions from the local zoning board, and must be prepared to follow them precisely. Only after all the preparatory work is done and approved can the lender release and discharge part of the mortgage.
Elements of a Partial Mortgage Release
The recorded document, titled Partial Release of Mortgage, sets forth:
- The date of release, the borrower’s name and address, the lender’s name, and its representative’s name and title.
- Information identifying the original loan recordation.
- The state and county where the property exists.
- A statement of release and discharge from the mortgage lien on the described area.
- An identification and description of the land not released from the remaining mortgage.
- A statement that the mortgage continues as a valid lien on the land that remains as collateral.
- The dated notary acknowledgement of the instrument’s execution.
The new legal description text provided through the survey should be incorporated by reference. Finally, the instrument and all related documents are filed, with the appropriate fees, at the local recorder’s office.
We trust this article helps owners consider both the details and the big picture. An owner seeking a partial mortgage release needs to know that both the zoning rules and the lending rules allow this kind of transaction with the specific property. The owner must also consider the various costs and time involved in the process. And the owner should feel sure that there will be no serious detriments to the enjoyment of the remaining land, now and in the future.
If all of these factors work out, and a buyer makes an attractive offer, then selling a portion of a mortgaged property could be an excellent decision.
Robert Nislick, Attorney at Law: Obtaining a Partial Release of Mortgage (updated Jan. 2015).
Ryan Cockerham, SFGate Home Guides: How Do I Get a Partial Release of Mortgage? (updated Jul. 2018).