(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
What is a property lien?
A lien on property is a public record notice attached to your property by a creditor that you owe money to.
Liens make your title unclear. When your title is unclear, it becomes very difficult to sell or refinance your property, as you need a clear title to do so.
While title can be conveyed without all liens being paid, most buyers will not purchase a property without clear title.
Even if a buyer wanted to purchase the property, you can be positive that no lender would approve the purchase.
Because of this, creditors know they're essentially guaranteed they'll collect what they're owed. That's why creditors love liens.
It's often the case that property owners don't even know there are liens on their property. They only find out once the liens are uncovered during a title search as the deal moves toward the closing table. Other instances involve the homeowner being aware of the lien, but lacking the funds to pay it off.
When the lien on a house is paid off, the creditor has been satisfied and the lien will be removed.
How to find property liens
There are 3 ways to search for a lien:
1. Search online
- You want to start your property liens search online via the county recorder, clerk, or county assessor’s office.
- The county assessor's office is the easiest to search property liens, as the online portal is very straightforward.
- Make sure to call first and find out specifics about how each county’s assessor’s office works before doing a property lien check. This is due to each county being a bit different in how they check for property liens.
2. Go to the county assessor’s office in person
- The only reason to visit the county assessor's office in person is if you’re unable to find your county’s assessor’s office online.
- This option is only relevant for some smaller and more rural counties that don’t have an online presence to find property liens.
3. Ask a title company to perform a lien search
- Going through title companies is the most effective method for finding properties' liens. It guarantees you won’t miss anything.
- It costs around $100 for them to perform a lien search on property, but is always worth it.
- If you go through the county assessors office and happen to miss a lien, it could amount to tens of thousands of dollars. It could also result in the inability to sell or refinance your property.
Types of Liens
Below is a property lien example for both a voluntary lien and an involuntary lien.
Otherwise known as a mortgage.
With a mortgage, the borrower (rental property owner) gets a certain amount of money from a lender (the bank). The lender, in turn, puts a lien on the property.
That lien allows the lender to foreclose if the borrower doesn’t pay, also known as collateral.
A voluntary lien won't cloud your title. The seller's loan is paid off upon closing and the lien is released during the closing process.
Involuntary liens are the liens placed on a property by creditors for unpaid obligations.
There are a few different types of involuntary liens:
- Tax lien - The most common type of involuntary lien. If you don't pay your property taxes for a number of years, the county will foreclose on your property. They do this by first placing a tax lien on the property and then foreclosing. Every county is different, but the process is essentially the same.
- Federal tax lien - The worst lien of them all. Federal tax lien's are placed on a property by the IRS for failure to pay your income taxes. When the IRS assesses your debt, they'll send you a bill telling you how much you owe. If you don't pay the debt in time, the IRS will exact a lien on your personal assets which includes securities, property, and vehicles. Federal tax liens are so bad, that even if you declare bankruptcy, the lien and tax debt often continue afterward.
To remove a tax lien or federal tax lien, you must first pay off the debt. Once the debt is paid off, you will receive a lien release from the government holder or the IRS 30 to 60 days afterward.
- Judgment lien - A judgment lien is placed on a property by unsecured creditors such as holders of credit card debt, medical bills, and personal loans. They must first file a lawsuit, win, and get a money judgement before obtaining lien rights.
To remove a judgment lien, you want to contact the creditor that filed the lien. Ask what the total amount due is, including all additional court or collection fees over the original judgment total. You can either pay off the amount owed up front or via a payment plan, or ask the court to remove the judgment lien. The court won't always remove the judgment lien, and depends on which state you're in and other contextual factors.
- Child support lien - If you owe a significant amount in child support or alimony, the other party may place a lien on your personal property. The lien stays until you pay the support you owe, until you sell or refinance your property, or until the other party forces a lien sale. Whichever happens first.
- Mechanic's lien - When you hire a contractor to perform a service and you fail to pay the bill, you might find yourself with a lien filed against the property. Mechanic liens will likely be satisfied when the home is sold. The contractor must record the lien within one to six months of not being paid. Then, they'd have to sue you to enforce the lien within about one year depending on the state you live in. If the contractor wins the lawsuit, they may be able to force the sale of your home.
To remove a child support lien or a mechanic’s lien, you must make a payment contingent upon them signing a lien release. It's often the case that the holder may not actually be aware of their obligation to remove the lien, or may be under the impression that it will automatically be removed.
It's important to understand property liens and how to get rid of them. Catching a lien early can prevent you from inheriting a major debt and help you succeed in your real estate investments scot-free.