Today we’re going to talk about liens with a focus on what they mean to you, the real estate investor.
First things first, what is a lien? A lien is a form of security interest granted over a property to secure the payment of a debt or performance of some other obligation. When one party is owed money by the property owner, they may place a lien on the property in order to attempt to recover the money that they are owed.
For example, a contractor may build an addition to a home where the homeowner does not pay what is owed, and the contractor places a lien on the property to secure his debt. Alternatively, a lien may be placed by the government to secure payment for unpaid taxes. There are many reasons a lien may be placed upon a property, but it always results in an additional headache when it comes to the transfer of the property. For instance, some lenders will not loan on properties that have liens. If a property has a lien, it will not have “clear title”. Instead, that lien will transfer to the new owner who is then legally on the hook for the old debt.
Proper due diligence on a potential real estate investment property should include checking to make sure that there are no liens on the property. If there is a lien, it would prevent the investor from securing clear title to the property. You can perform this check by running a title search to show if a lien exists on a property.
Of course, if a lien does exist, it does not explicitly prevent the transfer of title, and if the buyer is willing to take title to a property that has a lien on it, they may do so. Alternatively, it is possible to withhold sufficient funds from the sale to cover the entire lien, plus all interest anticipated while legal action is worked out. In this way, a sale can be conducted and the lien removed with clear title being transferred to the new buyer.
In summary, always make sure a title check is done on a property. That check will determine if there are existing liens. If there are liens, you must be prepared to deal with the consequences or move on to the next potential investment property.