Beginner’s Guide to Real Estate Liens and More

Perhaps one of the most complicated and complex aspects of homeownership is a real estate lien. If you are a property owner, then you need to be aware of the various kinds of real estate liens that could become a problem for the title of your property during your home sale.

Let’s begin, young grasshopper.

What is a Lien?

It is essentially a claim against any property made by someone with the intention of securing debt payments. A lien makes the property itself collateral against services owed to another entity. Selling your home is a lengthy process, and before you give over title to a new owner, you will need to take care of – or simply be aware of – any outstanding liens. Collateral will always be an asset that is pledged by the recipient of a given loan as a security. If the recipient of the loan cannot pay it back, the lender will take the collateral as a source of payment for the debt itself.

Types of Real Estate Liens: Voluntary & Involuntary

There are two main types of liens you will see in the real estate industry: voluntary and involuntary.

Voluntary liens are made as a contract between the debtor and creditor. The most common kind we see is the mortgage; essentially a bank loan given to secure the property. Banks will give sums of money to homebuyers in exchange for paying it back with interest over a specified period of time. Banks of course will retain the ultimate legal ownership until the buyer pays off the debt. Voluntary liens work much like mortgages, easily quantified and found and are most likely to be agreed upon.

Here’s where things get hinky

Involuntary liens on the other hand tend to be a problem, specifically because the homeowners did not create them. A lot of them are either construction liens or tax liens. Tax liens are often imposed by the government upon property taxes that are due as well as owing to a particular parcel. Not only can these have a serious negative impact on your credit report, but they will also hinder your ability to sell a property until you pay them off completely.

Construction liens are often the result of unpaid renovations on your property. Here’s an example. Imagine a contractor was hired to work on the landscape of your yard. You give a sum of money and hiring additional subcontractors completes the job. But what happens when your general contractor fails to pay the suppliers and subcontractors? In most cases, these will not be in the contact with you as the owner, meaning they will not be able to sue for breach of contract in such cases.

They can however file a lien on your property in a local county office. This could also cause a dispute between you and the general contractor over who pays the resulting lien. In the meantime, keep in mind that this lien is a stain on your title. Other less common cases of involuntary liens will include judgment liens, which can be imposed to secure payment for a court judgment, child support liens and so forth.

Unperfected & Perfected Liens

Liens may be perfected or unperfected. Perfected are those that have been recorded with a legal authority in respect to any third party creditors. Perfection is accomplished by following the law to give any third party creditors notice of the lien in question. An unperfected lien is a lien that a lender has not filed with the correct legal authority. As a result other creditors can make claims on the property. Situations such as these where the property happens to remain in the hands of the debtor call for a different set of steps, such as a notice of the property’s security interest.

Selling properties encumbered by liens

If you plan on selling a property with a lien attached, then it is unlikely the sale will go well unless you close the debt attached to it. Buyers will also expect liens to be paid if you want to allow for a transfer of the title. Work with an experienced First Team agent so that no legal responsibilities fall through the cracks.