Investing in a commercial or residential property can change your life, create generational wealth, and set you on a path to success. Unfortunately, roadblocks can pop up during the purchase and closing process and derail your dreams, and you’ll have to start the exhaustive process all over again.
One of the most common obstacles to closing on a property occurs when your title company finds a lien against the title to the property. A lien is simply a legal claim against a property to ensure that the owner will rectify a debt before they can collect earnings from the sale.
Typically wielded by banks, contractors, and our judicial system, you can usually locate outstanding liens during your title company’s exhaustive title search. A title insurance policy protects you and your lender from any financial loss in case of liens, judgments, property line disputes, or shady shenanigans on the part of the seller.
There are several different types of liens, and the process for getting them removed can vary widely, depending on the situation. If your title company discovers one or more of these encumbrances on a property you’re trying to buy, they’ll need to be addressed ASAP — or your closing could be delayed or canceled completely.
Previous mortgages are the most common kind of bank lien and receive high priority. If your prospective property has been sold before, the old mortgage should show as paid on the title records. As no system is ever perfect, occasionally a paid lien is not removed, and this will create a time-consuming delay in the purchasing process while it is being researched.
Homes and other property are sometimes used as collateral for business and personal loans. This gives the lender a way to recoup the amount back if the borrower defaults. Considered a voluntary lien, these have to be cleared from the title before a sale can proceed.
Both the IRS and local municipalities can issue a tax lien against a property if the owner has failed to pay income or real estate taxes. These share the highest priority with unpaid bank liens, and they will stay on the property until the debt is paid.
If the balance due is high enough or the owner doesn’t have the funds to pay, the property can be seized and auctioned off to cover it, or the lien itself can be sold. Investors can purchase property tax liens from local governments in thirty states. This is a risky strategy, as there can be plenty of unseen costs involved in taking ownership of the property in question, and it also might not be worth as much as you think.
The Mechanic’s Lien
A mechanic’s lien is a claim filed against a property owner by a contractor, vendor, or other service providers who have not been paid in full for work performed on the property. These can result from disputes over the quality of work, a breach of contract, or a host of other issues.
While vendors and contractors can also sue for the funds they’re owed, a mechanic’s lien gives them an additional way to ensure repayment without the costs and hassle associated with going to court. This kind of lien stays with the property, and not the owner who signed the original contract, so if your title company runs across one, it must be satisfied before the deed can be transferred to close the sale.
In the case of a newly built home, mechanic’s liens are cleared when the builder signs a release document and submits it to your county records office.
While judgment liens are relatively common, they can still cause a delay when you’re trying to close. These happen when a property owner loses a lawsuit and has to pay damages, a hefty fine, or other monies owed. The lien is filed to encourage prompt payment. This is an involuntary type of lien and a relatively drastic measure for a creditor to take.
Many real estate liens will expire after seven to ten years, but a persistent debt collector can file to renew them, and eventually force the property into foreclosure. As a result of a contested divorce or auto accident liability case, the lienholder will sometimes negotiate a lower settlement, but a signed payment agreement has to be reached before the lien is removed.
HOA liens are caused by nonpayment of homeowners’ association fees or fines. If you want to buy a house in a community with an HOA, you’ll need to be familiar with their rules and regulations, as the associations have the right to enforce penalties and pursue payment, up to and including forcing sale of the home.
Another kind of lien your title company might encounter is one for unpaid child support. If a parent does not make court-mandated child support payments, the state can place a hold on their property title to make sure any sale proceeds are assigned to satisfy that debt.
Mortgage and tax liens come first on the priority list, but as child support liens are pursued by the state, they’re something that definitely needs to be resolved by your title partner before a property sale can proceed. Time is of the essence in these cases, so a quick resolution is more likely.
What Should You Do?
At Landtrust Title, we will do exhaustive due diligence to confirm that you’ll have free and clear ownership of your new property. If any lien issues do arise, these pros can help you navigate through communications with the seller or lienholder — in fact, you may not even be aware of the extensive work being performed by your title company to ensure that these issues are resolved.
If you’re buying a property via auction, then you acquire title subject to any liens. You should fully research any financial risks before agreeing to a purchase.
Liens are just one of several issues that can have an effect on your closing timeline. But when your trusted real estate agent works with Landtrust Title, you can have confidence that you have highly qualified experts in your corner. We offer concierge customer service, expedited payments, and efficient results.
Questions? We can help! Contact us today at [email protected], or by phone at 312.528.9210.