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Many know that banks can claim your house if you default on a collateral-backed loan such as a home equity loan or mortgage. Some may be unaware that other creditors can also recoup unpaid debts by claiming a borrower’s home through the appropriate legal channels. They do this by placing a property lien on the house. Liens can complicate a property sale, even rendering it impossible in some cases. Understanding property liens can better equip a real estate agent to navigate the situation or help the client work through it.
What Is a Lien on a Property?
A property lien is a legal claim on a person's property by their creditor to recover an unpaid debt or obligation.
Property liens are usually leveraged by creditors who have not been paid. Once a lien is placed on your home, the creditor can foreclose on the house to recover the debt.
A creditor must file and be approved for a property lien through a county records office. Different states may have their own processes for lien filing. Often, the creditor will notify the debtor of the lien.
Types of Property Liens
Creditors may place different liens on a property based on the circumstances. Property liens can be voluntary or involuntary. Mortgages and home equity loans involve voluntary liens that you opt into, while tax liens, judgment liens, and contractor’s liens are involuntary. Some creditors don’t need permission to place a lien on your property if you haven’t paid them. They may rely on involuntary liens to recoup their money.
Contractor Liens
A builder's lien, also known as a contractor’s lien or a mechanic's lien, helps builders, contractors, and construction companies recover unpaid dues from a client. In some states, the ‘commercial lien laws’ category is where real estate agents/brokers may place a lien for outstanding fees.
HOA Lien
A homeowners association or condominium association may place a lien on your house if you’ve missed payments or dues. The HOA must follow a specific timeline. For example, they must notify you around 45 days before filing the lien (the exact period varies by state and the association’s bylaws). The HOA may file a lien with the city or county.
IRS Lien (Federal Tax Lien)
If you do not pay taxes, the government can put a federal tax lien on your property, real estate, or financial assets. Before placing the lien, the IRS will generally assess your liability and send you a notice demanding payment of overdue taxes. A lien comes into play only if you ignore the notice, can't, or won't repay the debt you owe.
Judgment Lien
Some creditors may take you to court over unpaid bills or dues. They may file a judgment lien to claim, then sell, your property and recover the outstanding amount. A judgment lien is only issued to creditors if the judge rules in their favor.
Mortgage Lien
By obtaining a mortgage or home equity loan, you’re agreeing to use your home as collateral. Your lender places a lien on your home, removing it only when the mortgage is paid off.
Some individuals may have a mortgage and an additional loan like a home equity loan, home equity line of credit, a junior lien, or a second mortgage. In this case, both lenders lay claim on your home if you miss payments on your loans, but there is a hierarchy that determines who is paid first when the house is sold. Typically, the mortgage lender will have the opportunity to recoup their loan first. Once the primary debt has been repaid, the home equity loan issuer can attempt to recover their loan.
Property Tax Lien
A property tax lien entitles the government to recover its dues by foreclosing on your home if you don't pay your property taxes. Property tax liens take precedence over mortgage liens, so not paying your property taxes may mean you and your lender lose the property.
Property Liens and Real Estate Transactions
As an agent, knowing how liens work can be helpful when working with clients who are buying or selling properties. Having this knowledge helps agents comprend the impact of liens on commercial real estate, as well as how lien releases function.
Buying and Selling Properties with Liens
It's a good idea for real estate agents to check properties for liens before allowing a client to make an offer. Liens on a home can complicate a sale or a lease. So, it’s better to know beforehand if the title is in question. Real estate agents can check to see if a home’s title is clear before assisting a client with a sale. This may come up often with short sales — a home sale where the sale price won't cover the owner’s mortgage loan and closing costs.
Commercial Real Estate Liens
Commercial broker lien laws enable agents to place a lien on a property when their client indicates they won't pay the commission. Placing a lien on the property makes it much harder to settle a sale, though in most cases, the threat of a lien pushes the parties involved to resolve the dispute. Commercial broker lien laws protect agents in 36 states; some fall under mechanic’s lien laws.
Lien Releases
A lien release is an official notice that the lien has been removed. The steps to obtain a lien release vary based on the lien type. For a lien to be valid, it must be filed in the public records in the county where the property is located.
For mortgage liens, the lender will typically provide a recordable lien release document once the debt is repaid.
For involuntary liens, the property owner must pay their creditor what they owe, draft a lien release document, and have the creditor sign it before having the lien release document recorded in the county public records.
Legal Implications of Lien on Property
A lien affects the property's title and makes selling difficult. Mortgage liens may be easier to navigate since property owners can usually use the proceeds from the sale to pay off any pending debt. The sale may go through, but the property owner will lose some of their profit to the lienholder. For instance, if a creditor has placed a lien on your home over unpaid dues amounting to $20,000, and you sell the house for $200,000. Your lienholder will claim $20,000 from the sale of the home.
When dealing with an involuntary lien, it may be much easier to repay your debt to remove the lien. Buyers may not want to consider a home with a lien on it since settling with creditors can lengthen the sale process, causing the buyer to lose interest.
How to Find Liens on a Property
Checking for liens on a property is part of a real estate agent’s due diligence when involved in a sale. Most buyers won’t be interested in purchasing a home with a lien, and those who are may be unable to find a willing mortgage lender. Discovering a lien after initiating a sale could render all your prior efforts futile, especially if the sellers are unwilling to settle their debt and obtain a lien release. This makes identifying liens early in the process essential for agents and buyers.
4 Ways to Search for Liens on a Property
There are a few ways to search for liens on a property. Remember that liens are a matter of public record, so the information is not confidential.
- You can hire a title company to do the necessary research. This is a paid service, and the company usually provides a report that includes information about any liens on the property you're interested in.
- Visit the county recorder's website and see if you can search for property records online. You may need to pay a small fee to download the form.
- If you need help finding the information online, consider visiting the local county recorder's office for information on property liens on a particular address. It may be beneficial to call ahead and inquire about business hours and processes.
- Some third-party websites also provide access to property records online. You may be able to search for lien records on the property you're interested in (often for a fee) and access a property report with the necessary information.
How to Remove Lien on Property
There are two main approaches to removing a lien from a property. If the lien isn't valid, you can request a court order to have the lien removed. You must provide evidence to prove that the lien is unlawful or invalid.
However, if the lien is valid, the best way to have it removed is to pay the creditor what you owe them and then secure a lien release. You can follow these steps:
- Review the lien terms to find out how much you owe. If you can pay the debt out of pocket, contact the lienholder and arrange a payment.
- If you can't afford to repay your debt, consider negotiating with your creditor. Lienholders are sometimes willing to clear a lien for less than you owe. You may be able to arrive at a resolution together.
- Draft a lien release letter using a template. The exact format will depend on the type of lien in question and your agreement with your creditor. Get the letter signed by the lienholder.
- Submit the lien release document to the local county recorder's office to have the lien removed from your property.
Agent Resources: Help Clients Navigate Property Liens
Homeowners may deal with different types of liens based on the kind of debt they face. Agents may also place a lien on a property when their clients don't pay commissions.
Liens on a house often result in slower and more complex sale processes. Sellers with a lien on their homes may struggle to find buyers or have sales fall through due to the risks a lien poses for buyers. These factors make it essential for agents to know about liens, understand how they work, and evaluate their impact on a sale. A well-informed real estate agent can help guide clients appropriately during a sale when a lien is involved and offer professional support.