When trying to sell your property the question of liens may come up. Having one on your property means the transaction can’t go through until the lien has been dealt with. They’re a standard part of real estate transactions, and if you want to avoid unexpected delays in a sale, they need to be clearly understood. Here’s the lowdown on property liens, what they are, how to find out if a property has one, and how to get it removed.
What is a lien?
A lien is a legal claim or right against a property for unpaid debts. Its purpose is to act as a security for someone who can repossess the property or take other legal actions to satisfy the debt. For instance, if you haven’t paid your real estate taxes, the government may impose a lien on your property. Private contractors can also place liens if they haven’t been paid for work they did on the property.
For example, imagine that you’ve bought a property through a mortgage. However, the lender requires a better guarantee then your signature, so they have the mortgage documents filed at the local government office. The lender has now become the lienholder (a person or organization that holds the lien). This secures a debt and gives the lender a better chance of being repaid for the loan. If the loan is not repaid the lender may have the right to claim and resell the property. Liens are also a signal to other creditors. If you apply for another loan, they will see that they won’t be the first in line when it comes time to be paid. This typically makes it almost impossible to sell or refinance until you have paid off your outstanding debts.
How is a lien found?
Before a property can be sold, it must go through due diligence. As part of this process, a title company will be brought in to search public records for any liens against the property. There are several types of liens:
- Home Loans – When you take out a home loan to finance a purchase the home will serve as the collateral. As part of the loan agreement, the home can be repossessed if you fail to keep up your end of the bargain. For instance, making monthly payments, insuring the property or living there as your primary residence for several years.
- Construction Liens – Contractors can also file liens if they haven’t been paid for work they completed. This also applies to sub-contractors when the contractor hasn’t paid them even if the homeowner is not at fault.
- Judgment Liens – If you lose a lawsuit and can’t pay back immediately then the creditor (the person who won the lawsuit) may file a lien against property you own.
- Tax Liens – If you fail to pay current taxes to local governments or the IRS they can place a lien against your property. This is very bad news as tax liens can be attached to current and future assets. The IRS can even jump the queue and collect before other creditors.
Most sellers are aware of liens against their property, but it is possible to be caught unawares. You may have received a recent lien for which you haven’t been notified of yet, or the lien could be so old that you’ve just forgotten about it.
How to remove a lien
If a lien is found, you’ll be informed by the title company how much it is and who you need to pay. Until the debt is paid or the lien released, you won’t be able to sell the property. Once it’s been settled, you’ll receive a “release of lien” from the entity that originally filed it. You have several options for how you deal with it.
- Pay it off – If the lien is legitimate then merely pay it off to get it removed. This is a pretty straightforward process.
- Settle – It’s possible to negotiate with the creditor if you can’t fully pay off the debt now. Some creditors are willing to accept less if they can get something now and put the loan behind them.
- Get it corrected – if you have good reason to believe a lien is not legitimate then contact the lienholder to have it fixed. It’s possible that the lien release got misplaced or lost in an earlier transaction.
- Dispute it – Things can get very complicated if you have to start legal action to get a lien release. Make sure you have reasonable grounds for a dispute before starting this process. For instance, a lien from the previous owner may have gone undetected during your title search on the property. Dispute though can be very long and costly. Most attorneys will advise just paying the lien as the best way to move the sale forward.