How is a real estate sale affected by a lien on the property? Certain types of liens may have an impact when you sell or when you buy. A thorough title search can uncover any clouds on a title, including various types of liens that have been placed on the property any time in the past.
Liens are relatively common in real estate, although they are sometimes minimized by sellers who are worried the presence of a lien will scare off buyers. Unfortunately, if the lien is not resolved before a contract is placed on the property, a title search will uncover the lien and delay or derail the deal. Also, liens may have been placed on the property in the past, unbeknownst to the owner. Undiscovered claims can cause years of legal problems after a sale.
Let’s go over what a lien is and the different types of liens that can be placed against real estate. We’ll look then at title searched. Then we can see how they impact a sale and how the lien can be resolved.
What Is a Lien?
A lien is a claim against a property an owner possesses or uses. The entity placing the lien can repossess or foreclose on the property if lien payments are not made on the associated loan or comply with other terms.
A lien can also be seen as an unpaid debt attached to a property. The most common lien against real estate is a mortgage, which is entered into voluntarily. Other liens, such as tax liens and judgment liens, are placed on property to compel the owner to pay the outstanding taxes or judgment. If the lien is not paid the owner cannot sell the property until the lien is resolved except under special circumstances.
A lien on a title can obstruct or delay the sale of a property, and if you are attempting to purchase property on which a lien is placed, you may not be able to close the sale without a special agreement.
Types of Liens
Mortgage Liens
As we mentioned above, a mortgage is a lien, with the property being held as security against the payment of the loan. In some states, a mortgage is called a deed of trust, but the impact on the title is the same.
- Mortgage liens take priority over other lien types except for tax liens.
- They are required to be paid in full to transfer the deed to a new owner.
- As long as the mortgage is paid, the lender will not exercise its right to take ownership.
Mortgage liens are considered voluntary.
Mechanic’s Liens
Mechanic’s liens are involuntary. When a contractor has an agreement with the property owner to perform services and improve a property. Upon completion of the work, the homeowner is expected to pay. If payment is not made, the contractor can place a mechanic’s lien against the property.
Since there are costs with filing a lien, a mechanic's lien typically indicates a significant financial responsibility has gone unpaid. The policy for handling mechanic’s liens differs by state, but all require the lien to be removed or satisfied before the deed can be transferred to a new owner.
Tax Liens
If the property owner did not pay federal, state, or local taxes, the taxing entity can place a lien against the property. The lien may be due to property tax non-payment or unpaid income tax.
A tax lien takes priority over any other type of lien and remains on the title until the debt is paid. If you find a property listed for a tax sale, it indicates the taxing entity has taken possession of the title and placed the property up for sale to satisfy the debt.
Judgment Liens
If someone has been sued and cannot pay the judgment, a judgment lien may be placed on any real property that the person owns to cover situations such as child support payments and auto accident lawsuits. In California, a spouse can file a lien to secure payment of attorney fees.
A judgment lien, like a mechanic’s lien, can place a cloud on a title and complicate a sale. Until the lien is satisfied, the title cannot be transferred to the new owner.
HOA Liens
These days, some homeowners’ associations can place liens against residents who do not pay their HOA fees. The HOA can even foreclose on a property. However, if you purchase a property with an HOA lien, the association may negotiate a reduction or partial release of a lien to allow the home sale.
Finding Liens
Any liens against property should be visible on the title. During the process of obtaining a mortgage, the title company performs a title search and may uncover liens, whether known or unknown to the seller. However, this occurs once a preliminary agreement is made to sell a property to another party. Also, there is a fee the seller or buyer must pay for the title report.
If you want to know if there is a lien on a particular piece of real estate, whether you are selling or buying, you can perform a title search online or at the county assessor's office. CourthouseDirect.com can create a deed and lien run sheet for a recorded subdivision, or you can manually search individual titles for liens.
To search for an adverse lien on a Texas property, all you need to know is the county where the property is located, the name of the owner (called the party), and a range of filing dates.
The Effect of Liens on a Property Sale
Since all liens must be paid before a property sale goes through, the most noticeable impact is a delay or cancellation of the sale. In certain circumstances, the sale can proceed, but only if the lien is paid off from the proceeds or by the owner before the sale closes.
If a property owner has enough equity in the property, the lien may be settled through the proceeds of the sale. The owner realizes less revenue in this case since the lien amount takes precedence and must be paid before title transfer.
- The seller can negotiate with the entity issuing the lien. If the seller agrees to pay a portion or sets up payments, the entity may remove the lien so the property can be sold.
- The seller can negotiate with the buyer. The buyer may be willing to take over a lien, but it is highly unlikely.
- Even if the buyer agrees to take over the lien, lending institutions may refuse to provide a mortgage loan.
One case in which the lien is transferred to the buyer is through a foreclosure or auction sale. Attached liens become the buyer’s responsibility, so if you are considering buying at auction or purchasing a foreclosed property, be aware of the liabilities before signing a contract.
A real estate professional or the title company can always help uncover any liens and try to get the seller to pay them off before the sale proceeds. Be sure that you understand what a lien on a title may mean before buying or selling real estate.
