Walnut Street Finance Blog

Everything You Need to Know About Liens

Posted by Walnut Street Finance Team on Oct 1, 2018 4:08:44 PM

The word “lien” conjures up images of evil bankers coming for your property, leaving you shivering on the sidewalk. But before you start worrying about liens being placed on your property for some reason, it’s best to educate yourself. We’re here to de-bunk some of the myths behind liens, as well as explain exactly what liens are, the different types of liens and why they happen, and what to do if a lien has been placed on your investment property.

Everything you need to know about liens

What is a Lien?

By definition, a lien is “a right to keep possession of property belonging to another person until a debt owed by that person is discharged.” For example, if you’re late making a mortgage payment, the bank or the mortgage company has a right to place a lien on your home until you’re caught up.

Now, if you’re just a couple of days late with one mortgage payment and you’ve never been late before, a lien probably won’t happen. When you’re consistently late and you don’t make any effort to catch up, that a lien is most likely to be placed on your home or whatever property you owe money on, including cars, boats, etc.

Different Types of Liens

There are a few different types of liens that can be placed on your property, but according to realtor.com the most common types are mechanics liens, judgement liens, and tax liens. We’ll define each type of lien below, when they happen, and how to avoid them.

1. Mechanics Lien: This type of lien is filed by contractors, painters, plumbers, and other general contractors as extra insurance to ensure they’re paid what they’re owed on time. Once you’ve paid everything off, the lien is removed and doesn’t remain on your record.

2. Judgement Lien: This type of lien is filed by the judge when you’ve lost a court case or by a lawyer when legal fees are due. In both cases, this type of lien is filed to ensure that all court and/or legal fees are paid on time. As with a mechanics lien, once the debts are paid, the lien is removed and doesn’t remain on your record.

3. Tax Lien: If you’re behind on paying your taxes or don’t pay them at all, the city, state, or county may file a lien in order to get the funds they are owed.

How to Find Out If There’s a Lien on a Property

If there’s a property you’re interested in and you think there might be liens, there are a couple of easy ways to find out what you’ll be up against before you make your offer.

The first way is to contact the county clerk’s office online or in-person. All you need to find the information is the address of the property, which is a matter of public record, or the name of the property owner (this might be a little more difficult to find). The second way is to contact a title company. They’ll be able to do the necessary fact-finding for you and help you resolve any outstanding liens.

Regardless of what anyone tells you, doing your due diligence is an important part of purchasing any property. For more helpful information, check out Bigger Pockets and this article from Zacks on how to buy a foreclosed property by paying the back taxes.

What to Do If a Lien Has Been Placed on Your Property

Identity Check. The first, and most important, step is to be sure the lien belongs to you. If you have a very common name or have relatives with a similar name, it’s possible that the lien was misplaced and belongs to someone else. You can work with a real estate agent and/or your title company to determine what you need to do to prove the lien doesn’t belong to you.

Clear the Lien. If the lien is on your property, you should begin taking steps to clear up the problem right away. If you’re selling the property, odds are good that you can use the proceeds from the sale to pay off the debt and clear the lien from your name. Paying it off will put you back in good standing with lenders and alleviate any headaches for the new owners of the property.

While it can be very stressful to have a lien placed on your property, it’s key to remember that everything will work out in the end. If it hasn’t ever happened before, do your best to pay it off as quickly as possible and set up systems to ensure it doesn’t happen again. See if you can set up some sort of repayment plan to make clearing the debt a little less stressful.

Purchasing a Property with a Lien

If there’s a lien on a property you want to purchase, clearing that lien up will most often fall to the seller. However, there will be instances when the seller doesn’t feel they should have to take care of it since the property will no longer be their problem, or instances where the property ownership is unclear or complicated.

Whatever the situation, you usually have two options: walk away or accept responsibility for the lien(s) in order to move the progress of the sale along. Sometimes it’s worth the extra headache of resolving the lien or taking legal action on it if the investment has a strong potential ROI. Ultimately, the goal is to do your homework beforehand, so you can anticipate any costs and risk involved in your project. Don’t be afraid to ask for help from a title company or realtor if you need it, especially on any sales that seem too good to be true.

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Topics: Fix And Flip Advice, Real Estate Investing Tips

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