Even under the best situations, selling a property can be stressful. There are documents to provide, critical contingency deadlines to meet, and reassuring the tenant they won’t have to move if you’re selling a rental property.
With all of these moving pieces, the last thing an investor needs is to discover an existing lien on the property they are trying to sell. Having to put the sales process on hold while you deal with a lien could cause a qualified buyer to have second thoughts and walk away from the deal.
Experienced real estate investors know that liens on a property are not that uncommon and that there are ways to work out any existing liens. In this article, we’ll discuss the most common liens on a property, how to conduct a lien search before you sell, and explain how to sell a property with a lien on it.
What is a Property Lien?
A lien is used by creditors to announce their right or claim against a property. A lien on a property places certain limitations on what an owner can do.
Having a lien against property you own isn’t that unusual. For example, you have a:
- Lien on your car if you financed.
- Lien against your home if there is a mortgage.
- Temporary property tax lien between the time the property taxes are assessed and the time they are paid in full.
However, trying to sell real estate with a lien on it can create potential complications for both the seller and buyer. That’s because creditors have rights to the property to ensure they get paid what they are owed before the property changes hands. In some cases, a lien may also allow the creditor the legal right to take possession of the property in order to pay off the debt owed.
Common Liens on a Property
There are several different types of liens to look for when you sell a property:
A mortgage lien is the most common lien real estate investors will find on a property. The lender will place a lien on a home when there is an outstanding mortgage balance due.
Mortgage liens protect the lender from the property being sold without the mortgage being paid off and also give the lender the right to foreclose if the borrower falls behind on the monthly mortgage payments.
County Property Tax Lien
A lien for property taxes is another common lien placed on a property. There are two forms of county property tax liens investors should be aware of.
Between the time that property taxes are assessed and paid, a lien is placed on the property to ensure taxes on the property are paid in full. Then, if the owner doesn’t pay the property tax when due, the lien will remain in force, with the property eventually being sold if property taxes remain unpaid.
Also known as a contractor’s lien or a materialman lien, a mechanic’s lien is filed by general contractors, subcontractors, or suppliers for work performed on a property or materials provided for which they have not yet been paid.
Liens are public record, so discovering that a mechanic’s lien exists is easy. However, sometimes property owners are unaware that a lien has been placed on the house by a supplier or subcontractor, especially if the general contractor has already been paid by the owner.
Real estate investors who own a property in a homeowners association can have a lien placed on the home by the HOA for unpaid dues, fees for breaking rules, or unpaid special assessments (such as refinishing a community swimming pool or paving the neighborhood streets).
In some cities and states, the HOA can actually foreclose on the property for an unpaid lien.
State Tax Lien
The state Department of Revenue (DOR) can file a lien on your property for unpaid personal or business taxes. Property owners who can’t afford to pay a state tax lien in full may be able to negotiate a settlement or a payment plan.
Sometimes, the DOR may be willing to remove the lien from the rental property being sold and place it on another owner asset that does not have an existing state tax lien, such as a personal residence.
An IRS lien on a property is the most serious because it takes priority over all other liens, including the mortgage. That means that when the house is sold, the Internal Revenue Service gets paid first before the lender does.
Property owners can negotiate with the IRS to settle the lien for less than the amount owed, but it’s best to hire an experienced attorney to work with the IRS.
A judgment lien occurs when somebody wins a lawsuit against the property owner, is awarded damages by the court, and records the judgment against the home.
Oftentimes, a judgment lien is filed by a collections attorney or agency, who may be more than willing to settle for less than the actual amount owed.
How Liens on Property Work
Liens placed on a property by creditors give notice to the public that the property owner owes the creditor money. Liens on real estate are generally filed and recorded with the county clerk’s office in the county the property is located in, not where the owner resides. That’s because the real property is used as collateral for the debt owed by the property owner.
There are some situations in which liens are transferred from to the buyer, such as when the property is bought through an auction or foreclosure. In these cases, the liens become the responsibility of the new buyer.
Property liens oftentimes can be negotiated for less than the amount owed, because creditors usually feel that receiving something is better than nothing.
However, property owners that are in the middle of negotiating the amount of debt owed should be careful not to let the other party know the house is being sold. Otherwise, the bargaining power shifts from the creditor to the debtor.
How to Sell a Property with a Lien on It
In order to sell a property, the home must have “clear title.” Clear title means that prior to the property title being transferred to a new owner, all existing liens and encumbrances must be paid off.
Liens on a property may be cleared by paying the debt in full, or by negotiating with the creditor to accept a lower payoff. Be sure to obtain a “lien release” from the creditor and have the document recorded as evidence that the existing lien has been removed and the creditor has given up its claim against the real property.
Resolving Lien Issues
- Pay the lien and clear the title as quickly as possible to avoid having problems closing escrow.
- Use part of the equity in the property to pay off existing liens by having your escrow office include instructions to pay the lien as part of your settlement agreement.
- Hire an experienced attorney to dispute tax liens or negotiate a settlement with creditors, then ensure that a lien release is recorded.
Preventing Lien Issues
- Obtaining title insurance when you purchase a home can protect you against unrecorded liens, or liens under the previous owner that the title company somehow missed when conducting the title search.
- Taxes, fees, and HOA dues and fines should be paid in full and on time to avoid having liens placed on the property and complications when you try to sell.
- Be upfront with buyers about the possibility that a lien may exist, and explain what you are doing to rectify the situation and remove the lien so that title can transfer free and clear.
How to Conduct a Lien Search
Owners should conduct a lien search before listing a property for sale in order to catch any potential problems before a qualified buyer does. Because liens are public record, searching for an existing lien is relatively straightforward.
There are three options for conducting a lien search:
Go to the county recorder’s office website for the county the property is located in and search by owner name and address to access property records and any recorded liens or judgments.
Visit the country recorder’s office in person and ask how to learn if there is an existing lien on a property. More often than not, employees in these offices are more than willing to help with your request.
Ask your escrow officer to order a title search for your property. They will normally do this at no charge in exchange for you allowing their office to handle the closing of your property when it sells.
Final Thoughts on Selling a Property with a Lien
Doing a lien search on your property should be part of your due diligence before putting the property on the market for sale.
In the same way that a pre-listing inspection is used to discover and make repairs before a buyer does, conducting a lien search and removing any existing liens can help to generate top dollar for your home when the time comes to sell.