Before you close on the purchase of a new home, you'll need to conduct a thorough review to determine whether the property comes with any outstanding liens. Although liens are commonplace in the real estate world, they're often overlooked or minimized by home-buyers and their allies. Unfortunately, the failure to anticipate and settle outstanding liens before closing can lead to delayed or derailed deals. Worse, undiscovered liens can cause years of legal problems after a sale. This primer offers some useful information about the ways in which liens affect real estate sales and the steps that home-buyers can take to mitigate these problems.
What Is a Lien?
The word "lien" descends from the Latin word for "binding", and its meaning is quite literal. Simply put, a lien is a form of interest that's designed to compel the owner of a piece of property to fulfill a financial obligation to a creditor or other party. Although liens come in many different flavors, they share some common properties that make them easy to identify and handle. In general, these interests are settled via monetary exchanges or cancelled by the action of a legal authority. In theory, a given piece of property can't change hands until all of the current liens against it have been settled or cancelled.
Common Types of Liens
In the United States, liens take a number of forms. In addition to the ubiquitous mortgage loans that constitute the most regularly used type of lien, the most common types of liens include:
- Tax liens
- Judgment liens
- Attorney's liens
These three types of liens are generally described as "non-consensual" liens. They're almost always are imposed by creditors or authoritative legal actors like state and federal government agencies.
Title Searches and Other Preliminary Steps
If you're purchasing a piece of property that has withstood frequent ownership changes or is currently mired in foreclosure, there's a good chance that it will come with multiple attached liens. Depending on the circumstances that surround your purchase, it's entirely possible that you won't become aware of these liens before taking possession of your home. Unfortunately, this won't absolve you of responsibility for them. Rather than suffer through a prolonged legal battle with the holder of a lien for which you should never have been held responsible, it's a good idea to conduct a title search and purchase title insurance before closing on a new home.
Title searches are easy to execute. Hundreds of American title search specialists are equipped to check for liens on residential or commercial property titles. If you're strapped for time, consider retaining a reputable attorney or real estate expert to conduct such a search. Alternatively, you can "self-search" an online real estate database that covers your jurisdiction. Neither of these options is free.
If you have more time to spare, you may be able to cut down on the cost of your title search by directly accessing your local jurisdiction's real estate database. You'll need to contact your municipal or county assessor for information about this title search method.
Delays, Complications and Other Issues
Some liens are more detrimental to real estate sales than others. Whereas mortgage liens are typically settled via the foreclosure process or the post-sale "zeroing out" of the previous homeowner's mortgage account, tax liens and attorney's liens can cause fearsome complications. Depending on the laws of the state in which the sale occurs, sellers may opt to evade responsibility for these types of liens and spark legal battles that can drag on for years.
In the interim, the closing process must be put on hold. For this reason, real estate experts often advise inexperienced home-buyers to avoid lien-ridden homes. This is easier said than done: To expedite sales, such homes are often sold at a discount to fair market value.
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