Before you close on your property, and before you’re even approaching the closing, you should find out if there’s a lien on your potential purchase. Recorded or unrecorded, liens can pose a unique threat to both selling a property and buying a property, and undermine all your budgeting. Knowing what liens are, finding out how to deal with them, and knowing how to find out if you have any is paramount to any real estate endeavor.
What Is a Lien on Property?
When a person or company places a financial claim that prevents someone from selling the property until that financial claim has been paid off, that claim is known as a lien. There are two types of liens:
- Voluntary Lien: This is a lien the property owner agrees to, like a mortgage. This involves a contract to impose the stipulation of the lien. It has no adverse effect on the property, the property’s title, or the homeowner’s ability to convey title.
- Involuntary Lien: These are placed upon properties due to unpaid claims, like tax bills or repairs, which are also occasionally known as a “mechanic’s lien.” These liens do impact your ability to sell your property. They’re also harder to discharge from the public record.
A title can be transferred without all the liens being paid off, but most buyers won’t go in on a property that lacks a clear title. And no lender would support the acquisition.
Where do I Look to See if There Are Liens on my Property?
Liens are a matter of public record, so it’s easy to discover if your property has a lien. You can do any of the following.
- Search the county recorder, clerk, or assessor’s office online. You just need the name of the property owner or the property’s address.
- Physically see the county recorder, clerk, or assessor’s office in person. Someone there will help you discover any liens.
- Contact the title company. Title representatives can help you find your lien if you have one. A good title rep is often a part of investing teams.
What is an Unrecorded Lien?
In some states, local municipalities can keep property liens out of the public record. You may not know you have open code violations, open permits with fees, or outstanding utility bills until you become the new owner. If this is the case, you’ll be forced to resolve these issues with the municipality.
The difference between recorded and unrecorded liens is significant. Mortgages, mechanic’s liens, or tax liens can be turned up by a title search. However, an unrecorded lien may not show up, which can, in particularly bad situations, lead to fines and fees that accrue unobserved, leading to hundreds if not thousands and sometimes even millions of dollars worth of fines.
Some examples of unrecorded liens include code violations like overgrown lawns, outstanding utility bills, unresolved fees for inspections, and special assessments for property or neighborhood improvements like road paving.
Homeowner’s title insurance tends not to cover the unrecorded debt. Luckily, a municipal lien search should reveal any unrecorded debt and anything else a traditional title search would miss. It’s wise to conduct a municipal lien search before closing to protect yourself against anything that a title search won’t disclose.
How to Remove a Satisfied Lien
A voluntary lien won’t affect your title. Voluntary liens are paid off during the closing, at which point the lien is released. When it comes to tax or IRS liens, you should automatically receive a lien release once the debt has been resolved. If you don’t get your lien release within 30 t0 60 days of paying off your lien, contact the lien’s originator to see what’s causing the delay.
The holder of a mechanic’s lien or a child support lien may not know that it’s on them to remove the lien. To make sure things go smoothly, you can have the final payment be contingent upon having your lien release signed. Additionally, liens must be notarized to be accepted by the county. Again, to make sure things go smoothly with smaller lien holders, set up your meeting at your bank to have your lien release notarized. Then submit it to your county recorder’s office, so the lien is removed.
What is Title Insurance?
Your lender will require that you get a title insurance policy if you’re getting a mortgage. This way, if there are any disagreements about the title, the lender is protected.
It’s only after a thorough title search made by the title company that one can get title insurance. The policy is written after the search is performed. The search will reveal any liens on the property, which the insurance policy protects against in most cases, such as errors, forgeries, omissions in deed transfers, and undisclosed heirs.
Title insurance differs from other insurance policies because title insurance protects you from things that happened in the past that have nothing to do with you, as opposed to, say, auto insurance, which offers protection against future accidents that occur to you.
Make Property Lien Search Part of Your Due Diligence
A cloud on a title is any claim, document, encumbrance, or unreleased lien that may invalidate or impair a title on one’s property or through the voracity of the title into doubt. While title insurance is adequate, a search can miss a lien still.
This is especially the case if the title insurance wasn’t purchased immediately when the property was bought. Additionally, not everyone you deal with in real estate is 100% honest. It’s possible that someone’s desire to sell a property compelled them to obfuscate the truth. It’s also possible that they missed or forgot about a claim against the title.
This is why a quick property lien search is such a good idea.
Can You Invest in Properties With Liens
A lien is a deal killer for many investors, but it doesn’t have to be. As long as you factor the cost of paying off the liens into your budget, you can still find a profitable real estate investment. Although dealing with liens is better for a more experienced real estate investor.
A lien can muck up your attempts at purchasing a property. It can prevent a lender from providing financing, eat into any profits or savings you may earn or have, and make you lose out on a deal. For this reason, whether you’re purchasing one home or are an investor, never take liens for granted.