Understanding Real Estate Liens
Types of Real Estate Liens
There are two main types of real estate liens: voluntary liens and involuntary liens.
Voluntary liens are created by a contract between the creditor and the debtor. The most common type is a mortgage, which is essentially a bank loan that is secured by the property itself. Banks give homebuyers sums of money in exchange for a promise to pay back that sum, with additional interest and costs, over a certain period of time.
The bank, of course, retains ultimate legal ownership of the property until the loan is paid off. Voluntary liens like mortgages are easily found and quantified; after all, you are most likely the person who agreed to its terms. At some point, you as the homeowner agreed to the terms of the mortgage and you (theoretically) have a plan for when you will pay it off and gain ownership of the property outright.
Involuntary liens tend to be peskier, because they weren't created by the homeowner. Many of them are either tax liens or construction liens.
Tax liens are imposed by the federal, state, or local government based upon back property taxes that are due and owing against a particular parcel. Not only can these seriously impact your credit report, but until they're paid off, they hamper your ability to sell the property.
Construction liens are usually the result of unpaid renovations conducted on your property. As an example, imagine that you hire a contractor to re-landscape your backyard. You give the general contractor a sum of money to complete the job, which might include planting, installing a pool, and constructing a fence. The general contractor might, in turn, use some of that money to hire subcontractors to complete specific tasks (e.g., excavating the pool) or supply specific materials (e.g., stone walkway).
What happens if your general contractor fails to pay one of these subcontractors or suppliers? These subcontractors and suppliers are not in contract with you as the owner, meaning that they cannot sue you for breach of contract. However, they can file a lien on your property in the office of the county clerk. Typically, this would cause a dispute between you and your general contractor, and you would try to force the contractor to pay off the lien. But meanwhile, this lien (sometimes called a “mechanic’s lien”) represents a cloud on your title.
Other, less common involuntary liens include judgment liens, which are imposed to secure payment of a court judgment, and child support liens, which can be imposed based on unpaid child support. Both require court approval before they can be imposed on the homeowner.
Perfected and Unperfected Liens
Liens may be "perfected" or "unperfected." Perfected liens are those liens for which a creditor has established a priority right in the encumbered property with respect to third party creditors. Perfection is generally accomplished by taking steps required by law to give third party creditors notice of the lien. The fact that an item of property is in the hands of the creditor usually constitutes perfection. Where the property remains in the hands of the debtor, some further step must be taken, like recording a notice of the security interest with the appropriate office.
Selling Property That's Encumbered by a Lien
If you are planning on selling property that has a lien on it, it is unlikely that the sale will close unless the debt is taken care of. A buyer will expect liens to be paid to allow for a transfer of clear title.
Checking for Existing Liens When Purchasing Property
When purchasing real estate, it is important to make sure there is no lien on the property that will keep you from securing a clear title to the property. Generally, a bank or other mortgage lender will not provide mortgage financing until all liens on the property have been removed. A title search will usually indicate whether or not a lien exists and whether the seller is the legally recognized property owner. It should also indicate the exact legal description of the property, as well as providing details regarding a lien or other encumbrances against the title.
Transferring Property Without Removing Liens
The law does not require that liens be removed before title to property can be sold or transferred. But the lien will need to be cleared up if the buyer needs financing or wants clear title. If property is transferred without the lien being paid off, it remains on the property. Thus, in transfers between relatives, the new owner may be willing to take title to property that already has liens encumbering it.
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