Every real estate investor should know the basics of a property lien before engaging in any contract. Otherwise, you can end up saddled with debt that you had no intention of taking on. As IRS tax liens are not discharged upon sale, this is especially important to remember when bidding on homes at auction. So, understanding what a property lien is and how to search for liens is essential.
What is a Real Estate Lien?
A lien on real property is a claim against the owner's equity in the property for unpaid debts. The document must be filed with the appropriate county or state office and then served on the property owner with a notice that their possessions may be seized if they fail to make the required payments.
How Property Liens Work
Several options exist for creditors to use liens on the property. This is a legal claim to an item or piece of property. Creditors need to apply to and receive approval from a county records office or state authority in order to secure a lien on a piece of property. Property lien laws and restrictions might vary widely depending on where you live.
The government may place a lien on a person's assets (such as their bank accounts, real estate, and automobiles) in order to secure a debt owed to the government. There will be legal action taken, and their property may be seized as a result. Levy is the procedure of actually taking possession of the land. If this happens, the property may be auctioned off by the sheriff.
Examination of both voluntarily and involuntarily placed liens
Voluntary Lien
A voluntary lien is created when a homeowner voluntarily pledges their home or equity as collateral for a loan. The owner has agreed to the lien, making it a contractually authorized lien. If the debt is not paid as agreed upon, the creditor may be able to take legal action, such as foreclosure, to reclaim some or all of the money owed. The mortgage loan is an example of a frequent voluntary lien.
Involuntary Lien
There can be liens placed on property when people fail to meet their financial obligations. The tax lien is the most common form of a non-payable lien. If property taxes are not paid for an extended period of time, the county may foreclose in order to recoup their losses. While each county will have its own set of rules and regulations, the overall method will be the same.
The Internal Revenue Service (IRS) will do the same thing if your income taxes are overdue. In the event of a foreclosure, the tax lien will stay on the property even after the bank has taken ownership.
Involuntary liens on your property are not limited to those imposed by the government. To illustrate, a mechanics lien can be filed on a property if a contractor completes work for a client but is not paid. Construction companies, subcontractors, and individual builders are all protected against not being paid by filing a mechanic's lien on the property. Suppliers of materials and subcontractors working on the repair of a structure are likewise protected by mechanic's liens. In the event of liquidation, the lien guarantees that the workers will be paid before any other creditors.
The only way to get rid of an unwanted lien is to go to mediation or court and argue that it should be eliminated. If you're hoping to sell the property, this process could be lengthy. You must also remove all liens before receiving any money from the sale.
Unpaid payments like utility or HOA fees or child support can result in liens being placed on your property involuntarily. A judgment lien is imposed when a court decides that a debtor must pay money to another party.
How to Search for Property Liens
Do you want to find out if there are any liens on a certain piece of property? Because liens are recorded in the public record and may be found on every given property, it is simple to obtain this data.
Real estate investors should always perform a title search as part of their due diligence before purchasing a property to ensure there are no hidden surprises down the road. A lien search can be conducted in one of three ways:
- Look for it online; the county assessor's office is a good place to start.
- Visit the county assessor's office in person.
- Ask a title company to conduct a lien search.
If you intend to search for liens on your own, either at the county assessor's office or online, you should call the assessor's office and ask for an explanation of how the system works. There is no uniformity between the county portals.
If you don't feel like doing the legwork yourself, hiring a title firm to do the research for you is an option, but it will cost you. It's important to undertake your own investigation into a property in addition to the title company's in order to avoid any unpleasant surprises down the road.
When a property is under contract for sale, title companies will also do title searches. The next step is to present a title commitment, which promises to remove all encumbrances from the property prior to closing. You will get title insurance at closing, and if the title firm fails to pay a lien, the insurance company will do so instead of you.
If a lien appears on a piece of property you own or plan to buy, don't freak out. A lien release or other proof of payment may be all that's required to satisfy the lien holder. But, if the lien has not been satisfied, the sale of the property cannot be finalized.
How to Remove a Lien
Liens can be eliminated with a simple payment. For this reason, the loan will be reflected as a liability on the HUD or settlement statement at the closing with the title firm and will need to be satisfied before any funds can be released to the seller. A title company will file the necessary paperwork with the county to clear the lien.
When you settle a debt with the government, they are required to provide a lien release within a couple of months. A true lien release for private parties may require extra work on your part.
This is why, when paying a contractor for their services, it's smart to also get a lien waiver. An unjustified contractor lien can be avoided by obtaining a lien release after the work has been completed.
As mentioned above, a lien must be removed through negotiation if there is a dispute over it. Time is of the essence in many real estate transactions, so you may need to just pay it.
Even after a property has been sold at a tax foreclosure auction or through a probate process, there may still be liens on it from years or even decades ago. Perhaps, more commonly, liens have been satisfied but not properly recorded.
For these reasons, it's common practice to have a title company carry out an "action to quiet title." Title companies use a technique called a "quiet title action" to get rid of these liens. A quiet title action can be conducted by most title agencies for roughly $1,000.
Because of the time involved (often months), the property's title may be muddled, making it difficult or impossible to sell or refinance. If a clear title cannot be obtained by any other means, however, a quiet title action will need to be initiated.
Conclusion
Maybe the single most important legal device for real estate investing is the property lien. By understanding what they are and where to look for them during due diligence, you can avoid inheriting a large debt and boost your chances of real estate investment success.
