For a real estate investor, one of the first steps in performing due diligence is to ensure the property of your choice has no involuntary liens against it. Sellers should let buyers know of any cloud on the title, but not everyone is honest. In some cases, they may be completely unaware of the lien.
Searching for a lien, involuntary or not, is a relatively simple process. However, there are some tips and tricks to identifying liens in the public records.
A lien is a legal mechanism a creditor can use to make a claim to property to secure payment. A mortgage is a type of lien; however, it's voluntary and isn't a negative mark against a property.
Involuntary liens are those placed against property because of nonpayment of some type. Usually, a lien is the first step in repossession or foreclosure proceedings. If you can’t pay up, the lien allows the creditor to seize, repossess, or foreclose on the asset — in this case, real estate — as a form of payment.
The lien also allows the creditor to take other legal action against a creditor as well as places the creditor at the top of the pile to receive a share of the money when the property is sold.
Fun Fact: Liens are always encumbrances, but not all encumbrances are liens.
Types of Involuntary Liens
As we mentioned above, voluntary liens include things like mortgages. The creditor takes on the lien voluntarily and with full knowledge of the requirements for clearing the lien.
Involuntary liens come in several flavors. Also, known as statutory liens or non-consensual liens, these liens are not placed with the consent of the creditor, and most are negative marks against a property.
The most common involuntary lien is a tax lien. Placed for nonpayment of taxes by the federal, state, or local government, a tax lien represents litigation against property owners who owe back taxes. Governments place liens on real estate not only for nonpayment of property taxes but also when income taxes are in arrears.
Tax liens can result in foreclosure and the sale of the property at auction.
Judgment liens are the result of a lawsuit brought by a creditor to compel payment for unsecured debt, including personal loans, credit card debt, medical bills, and others.
Typically, a creditor receives a judgment lien on real estate or personal property after winning legal action and financial judgment.
Child Support and Alimony Liens
You may not realize that nonpayment of child support or alimony can result in an involuntary lien against a property. If a debtor owes a substantial amount of money, the recipient can place a lien on the debtor's real estate or personal property.
Mechanic’s and Contractor’s Liens
A mechanic’s or contractor’s lien can result from nonpayment for services rendered to a contractor, subcontractor, or other tradespersons who performed work on the property. In some cases, a contractor may request a lien on the property with the intent to force a sale.
Homeowners Associations place liens for nonpayment of HOA dues.
How to Search for a Lien
Step One - Obtain the Property Data
To search for a lien or any other data on a piece of property, you must obtain the name of the property owner, the address of the property, or the assessor’s parcel number (APN).
If you don’t have the exact address, you can look at the county assessor’s parcel map and estimate the address.
You should be able to get lien information from the current owner; however, you may need to use a third-party tool to get the data.
Step Two - Search Public Records
Performing a grantor search on an address or APN shows all open mortgages against property, including:
- The amount of the mortgage.
- The person taking the mortgage.
- The location of the property.
- The lienholder of the mortgage.
Once you have the ownership data, contact the county clerk's office. Search public records. Take advantage of the clerk's office workers if you get stuck. Use index books to construct a chain of ownership back to at least 70 years of deed history if it’s available.
Many public records are available online. The quality of the search tool may vary between jurisdictions.
If you don’t have time to perform the search yourself, or you require information on multiple properties, you can always pay a title company to perform the search for liens.
What to Look For
Mortgage liens are voluntary, as are home equity loans or second or third mortgages.
Lenders who extended secured financing and filed a UCC-1 Financing Statement with the secretary of state can create liens against home equity. The document should be part of the public record.
Also look for tax liens, mechanic’s liens, any breaks in ownership, and lien releases from previous liens.
Step Three - Determine if the Lien Is Cleared
If you find an involuntary lien, determine if the lien has been cleared legally. Verify the liens you see have been paid out or cleared before purchasing the property. This is especially true if you are purchasing a property from an investor who bought the property at a foreclosure auction.
Some owners don’t realize that they must request the lien to be cleared. They assume paying off the lien automatically closes it. Check for documentation that the lien has been removed before buying.
Occasionally, you may find a lien has been filed fraudulently. In these cases, the seller or attorney must work to vacate the lien before you purchase.
Bottom Line - Involuntary Liens Are Red Flags
Most of the time, involuntary liens are a deal-breaker for a property sale. Liens can be more trouble than they’re worth.
On the other hand, you may be able to make a profit if you factor in the back taxes or other liens in your calculations. The seller may be willing to discount the liens against the purchase price.
It’s up to you, of course. Start due diligence with a public record search. Visit the courthouse, take advantage of the county’s online tool, or use a tool such as CourthouseDirect's grantor/grantee index to perform a deed search.
Search for adverse and involuntary liens before you fall in love with a property. It could save you a lot of headaches.