Property Lien Searches and How to Conduct Them

A property lien is a standard part of the real estate business that all real estate investors should understand before entering any deal. If you don't, you can be stuck with a debt you never expected to incur. This is especially true when buying auction properties, as IRS tax liens aren't removed at the time of sale. So, it's critical to know a property lien and how to check for liens on any given property.

What is a real estate lien? 

A real estate lien is a legal right to a property that can be enforced if the owner doesn't pay their debts. It must be filed with a county or state agency and then sent to the property holder with a warning that their assets may be taken away if they don't pay up.

How property liens work

Creditors have the option of utilizing property liens in various circumstances. This is a judicially-granted right to a particular possession or asset. To acquire a property lien, the creditor must submit an application and obtain approval from a county records office or state department. The laws and regulations that control property liens differ from county to county.

The government may put a legal claim on a person's possessions (e.g. bank accounts, real estate, and vehicles) by putting a lien on them. This is a warning that legal action is being taken, and their assets may be taken away. The process of physically taking the property is called a levy. This can result in the assets being sold at a sheriff's auction.

A look at voluntary and involuntary liens

Voluntary lien

Anytime a homeowner uses their property or the equity in their property to secure a loan, that loan securing the property becomes a voluntary lien. The rationale is that the lien is a contractually permitted lien that is agreed to by the property owner. In this circumstance, if the debt is not paid per the contract terms, the creditor may have specific remedies available to help recoup the debt owed, such as foreclosure. A common form of a voluntary lien is a mortgage loan.

Involuntary liens

When individuals don't pay their financial responsibilities, others can put a lien on their property as a result. The most common type of involuntary lien is the tax lien. If taxes are not paid for a certain period of time, the county can take action to recover their money by putting a lien on the property, followed by foreclosure. Each county has its policies and procedures, but the overall process is generally similar.

Similarly, the IRS can place a federal tax lien on your property if there are unpaid income taxes. When a bank takes ownership of a house due to foreclosure, the tax lien attached to the property remains in place.

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. A mechanic's lien guarantees payment to builders, contractors, and construction firms that build or repair structures. Mechanic's liens also extend to suppliers of materials and subcontractors and cover building repairs. The lien ensures that the workmen are paid before anyone else in the event of a liquidation.

If an unnecessary lien is placed on your property, it may be necessary to take part in mediation or go to court to have it removed. This could take a while, particularly if you want to sell the property. Additionally, any liens must be paid before you can receive any proceeds from the sale.

There may also be involuntary liens for unpaid bills such as utilities, homeowner association dues, and child support. This is referred to as a judgment lien, which is put in place after a court ruling that the debtor is obligated to pay money to the other party.

How to search for liens

Are you curious about discovering any liens on a specific property? Obtaining such information is easy since liens are a matter of public record and can be located on any property.

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:

1. Search online, particularly at the county assessor's office. 
2. Visit the county assessor's office in person.
3. Ask a title company to perform a lien search.

If you 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 of how the system works. Each county's website is different. 

Hiring a title company to do the necessary research for you can be an option, but it will come at a cost, and the outcome will likely be the same as if you did the work yourself. To avoid any unexpected issues down the line, it's wise to carry out your own research in addition to that of the title company when considering buying a property.

Title companies will also 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 ensure 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.

Don't be alarmed if you discover a lien on the property you own or intend to purchase. You may only need to present evidence of it being satisfied, such as a lien release, to the proper individual. However, if the lien remains unpaid, it must be resolved before the finalization of the property's sale.

How to remove a lien

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. You may have to be more proactive in procuring an actual lien release for other private actors.

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 must negotiate to remove it. Depending on the situation, you may just need to pay it, as time is of the essence, especially when selling a property.

Sometimes there are liens on properties — particularly those that have passed through tax foreclosure or probate — that were put on long 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 – 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 a clear title, you must be prepared to use it.

The bottom line

Property liens are perhaps one of the most crucial legal mechanisms to understand regarding real estate investing. Knowing what they are and how to search for them in your due diligence will prevent you from inheriting a significant debt and help you succeed in your real estate investments.