What to Know About Liens When You Want to Sell Your Home
Unknown liens and encumbrances can derail a sale, so it's vital to know if there are claims against the property you want to sell. Typically, an owner will be aware of a lien at the time it is filed against the home, but not always. In some cases, the existence of a lien is discovered only during a required title search prior to closing.
A lien is essentially a notice attached to the property deed. It represents a monetary claim, which must be cleared or "satisfied," before the title can be transferred to a new owner. Property liens are public record. In order to be valid, they must be filed, typically with the clerk of the county in which property is located. A lien is valid only for a specified length of time; it varies with the type of lien and from one state to another. Some liens can be renewed. The record of a lien never disappears from property records, even when it is paid in full or otherwise settled.
While a property lien represents a stumbling block on the path to a sale, there are ways to handle most liens. Here's what Hesperus homeowners should know.
Types of Liens
Different types of claims can be attached to real estate. Each is filed against a specific property for a specific purpose. In effect, a mortgage is a type of lien, because It represents a contract between buyer and lender. A first mortgage always takes priority over other claims, even though all liens must be satisfied when a property is sold. Other liens or claims can be paid, partially or in full, only when the mortgage amount is paid in full, even in cases of foreclosure.
- Consensual or Voluntary Liens: As noted, a mortgage is the primary form of consensual lien. Any other type of contract, which cites property as collateral, is considered a voluntary lien, including a second mortgage or a home improvement loan.
- Statutory or Involuntary Liens: Certain types of liens, for unpaid taxes or sums owned to a homeowners' association, for example, are created without a need for consent by any party. They are enforceable without a court order. On occasion, a lien holder will take the next step to force payment by initiating foreclosure proceedings.
- Judgment Liens: Created as a result of court action, a lien against property is created when a court issues a "judgment" against a party in a lawsuit, or as a result of other unpaid debt. It represents a serious effort to collect on a debt, along with other remedies, including garnishment of wages and seizure of bank accounts. This is a first step and might result in sale of the property. Again, however, funds are only collectible after a primary mortgage has been paid.
The most common type of lien homeowners encounter are a form of involuntary lien, which involves non-payment of bills submitted by contractors in conjunction with work performed. In some states, it is common practice to file a lien against property in advance of completion as a sort of guarantee the payment will be forthcoming. Such liens are routine, and are routinely cleared when payment is received. Occasionally, there can be a slip-up, which results in the official record not being updated. Such discrepancies are rare, and are easily remedied.
How to Deal with a Lien
A property lien must be cleared before the title can be transferred to a new owner, but that doesn't necessarily require the full amount of the lien be paid prior to closing. Liens are filed for a variety of reasons, and there are also a variety of ways to deal with an existing lien.
In some cases, individual creditors agree to accept less than the full amount due or the prospective buyer may agree to settle an account. Property liens also expire unless rights are renewed by the creditor, so a common strategy is to simply wait to sell the property. It is also accepted procedure for a seller to "bond around" a lien, especially with new construction. Typically, an amount equal to two or three times the actual debt will be escrowed at closing. The lien amount, plus interest and associated fees, will then be paid out of sale proceeds, and the clear title is then recorded in the new owner's name.
It is easy to determine if there are existing liens on property you own, or on property you are interested in buying. Simply contact your local country clerk's office to obtain the records. Contractor disputes, unpaid taxes, assessments and property-related fees or dues, or unrelated judgments can result in liens a seller is sometimes not aware of. When selling real estate, it is always better to be prepared in advance to handle potential problems rather than be surprised and lose a sale at the last minute.