Property liens are a pretty standard part of the real estate business that every investor needs to understand. If you don’t, you can find yourself stuck with a debt you never expected to incur. This is especially true when buying auction properties, as IRS tax liens are not removed at the time of sale. So, it’s critical to know what a property lien is and how to check for liens on any given property.
According to Investopedia.com, a real estate lien is “a legal claim on assets which allows the holder to obtain access to property if debts are not paid… and must be filed and approved by a county records office or state agency.” In other words, liens give creditors a way to collect debts owed to them by clouding the title of your property (and often allowing them to foreclose). Generally, a property cannot be sold without the liens being satisfied.
There are two types of liens: voluntary and involuntary.
The most common type of voluntary lien is a mortgage (or trust deed, depending on which state you are in). As should be expected, this is a lien you voluntarily take out and the terms of that lien should be directly stated in a contract (or in the case of a loan, the mortgage/deed of trust and the note).
With a mortgage, the mortgagor (borrower) gets a certain amount of money, while the mortgagee (lender) gets the note and a lien on the house. That lien allows the lender to foreclose if the borrower doesn’t pay. The lien thereby gives the lender collateral for the debt.
Involuntary liens are placed on the property by others for unpaid obligations. The most obvious example of this is a tax lien. For example, if you don’t pay your property taxes for a set number of years, the county will foreclose on your property. They do this by first placing a tax lien on the property and then foreclosing. Every county is different, but the process is generally similar.
In a similar vein, if there are unpaid income taxes, the IRS can place a federal tax lien on your property. And if a bank forecloses on a house, that tax lien stays with it.
And it’s not just the government that can place involuntary liens on your property. For example, if a contractor does work for someone and that person doesn’t pay them, the contractor can place a mechanics lien on the property. In some places it can be easy to place a lien on a house, even if it’s frivolous. But if there is a frivolous lien placed on your house, you will probably need to go to mediation or even litigation to have it removed. This can be a time-consuming process, especially if you are trying to sell a property. And remember, when a property is sold, all liens get paid off before any proceeds go to the seller.
Other potential liens could be for unpaid utilities, HOA dues, child support payments, etc.
How to search for liens
Searching for liens on a property should be part of any real estate investor’s due diligence when looking to buy properties. There are three ways to do a property lien search:
- Search online, particularly at the county assessor’s office. Here’s a state-by-state list.
- Visit the county assessor’s office in person.
- Ask a title company to perform a lien search. (Recommended)
If you choose to look for liens yourself, either at the county assessor’s office or online, it would be a good idea to call the assessor’s office and ask for an explanation on how the system works. Each county and each county’s website is different. And some smaller and more rural counties might not have everything online yet. Normally, the county’s onsite system and website are relatively easy to use, but it may take some getting used to. And again, you don’t want to miss anything when you’re first learning how to use the system.
This is why it helps to go through title companies. Title companies, such as First American Title and Chicago Title, will usually charge $50-$150 to do a title search, but it’s definitely worth the cost. If you try to find the liens yourself and miss one, you could be in a for a huge bill. Some liens amount to tens of thousands of dollars.
Furthermore, title companies will always run title searches when a property is under contract to be sold. Then they will offer a title commitment, which guarantees they have found all the liens on the property and insure they will “clear” them at closing. At closing, you will pay for title insurance, which means that if the title company misses a lien, the title company is responsible for paying that lien, not you.
Most other insurance policies protect you against something what might happen in the future. For example, a homeowner’s policy will protect you if your house catches on fire at a later date. The title insurance, on the other hand, protects you against something in the past that has already happened and had nothing to do with you. But if it’s not caught during the title search, it will be your responsibility to pay for it — unless, of course, you have title insurance, in which case, you are protected from such risks.
Never buy a property with just a quitclaim deed (which simply transfers title along with any liens attached) or without a title company or attorney, as you might get stuck with a huge lien that will ruin any profit margin you were hoping for.
The easiest way to remove a lien is simply to pay it. This is why at any closing with a title company, the loan will be listed on the HUD or settlement statement as a debt to be paid before any proceeds are released to the seller. A title company will record this transaction with the county and the lien will be satisfied.
If you are paying off any government holder, they should send you a lien release within a month or two after the debt has been paid. For other private actors, you may have to be more proactive in procuring an actual lien release.
This is one reason why it’s a good idea, particularly with contractors, to ask for a lien waiver when providing the final check for whatever work that contractor performed. By getting that lien waiver once the job is done, a contractor can’t frivolously put a lien on your property.
As noted above, if there is a dispute over a lien, you will need to negotiate to get it removed. Or, depending on the situation, you may just need to pay it, as time is of the essence, especially when selling a property.
One final note: Sometimes there are liens on properties — particularly those that have passed through a tax foreclosure or probate — that were put on a long time ago. Or, as is often the case, there are liens that were paid off, but the recording wasn’t done right. In these cases, you may need to ask a title company to perform what’s called a ‘quiet title action.’ Quiet title actions are a process title companies go through to remove such liens. It usually costs around $1,000, and most title companies should be able to carry out a quiet title action. They can take a while (sometimes several months) and, in the meantime, the property’s title will be clouded, and it will be tough or impossible to sell or refinance. But, in cases where quiet title action is the only way to get “clear title,” you need to be prepared to use it.
Property liens are perhaps the most significant legal mechanism to understand when it comes to real estate investing. Knowing what they are and how to search for them in your due diligence will prevent you from inheriting a major debt and help you succeed in your real estate investments.
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