I found out there is a lien on the house. What are my buyer’s rights?
Your excitement at finding that great house just fizzled.
Your real estate agent initiated a title search on the property you intend to buy and she tells you that there are liens against the house.
Does this mean the sale cannot go through?
It could delay the closing however, as the seller must first pay off the liens before the title can transfer to you free and clear.
The most common type of lien is a first mortgage which gives the lending bank a first lien to the property. The property is used as security for the repayment of the loan down the road and the lien remains on record until the loan is paid off.
Most home purchases proceed smoothly as the buyer’s payment for the home, through cash or his own mortgage, will pay off seller’s obligation at closing.
Most home buyers are taken by surprise when they discover that the property is encumbered several times, in other words, more than one institution has laid a claim to the property.
The seller may have incurred more debt on the home in the form of a second mortgage or home equity line. This is reflected as an additional recorded lien.
When selling his home, the seller must first pay off those two loans before the title of the home is free and clear and can pass to the buyer.
There are other types of liens a buyer must be aware of and a few are mentioned below.
Property tax liens
The first and second mortgages mentioned above are the most common kind of lien and come about with the borrower’s consent.
He agrees to transfer interest in his property to the lender until the mortgage is repaid. Sometimes, liens are filed involuntarily, or without the homeowner’s consent.
The most common type of lien of this type is for unpaid property taxes. When a homeowner fails to pay his real estate taxes, the city or town may be compelled to file a Property tax lien against the property.
In most states, any liens relating to unpaid property taxes, regardless of whether they were filed after a first or second mortgage would have a higher ranking than a creditor’s lien. The same often applies to liens imposed by Home Owners’ Associations (HOAs) or condo associations for unpaid fees. Rules could vary from state to state.
If the homeowner does not pay the property taxes owed, then the government or municipality can force the property to be sold under a foreclosure process and use the proceeds to pay the tax bill.
Foreclosures are generally not the favored route by which municipalities get their tax proceeds from the homeowner as the process can drag out for many months or longer. For patient buyers however, it can be a great way to obtain a home at a reduced price.
Foreclosures tend to rise in number during recessionary periods. There are many parameters to consider if buying a home this way so we will talk about them in a later blog.
IRS Tax Lien
We just mentioned liens that result from unpaid property taxes. If you fail to pay your income taxes timely, the federal government has a legal right to file a claim against your property. The IRS assesses your tax liability and sends the individual who owes the tax a Notice of Federal Tax Lien.
This document alerts other creditors that the government has a legal right to your property, in this case, via Federal Tax Lien in the home. Of course, no one want this type of lien so the best way to avoid it is to simply to file and pay all your taxes on time.
As the name indicates, this type of lien occurs when a creditor is owed money and successfully sues the debtor (homeowner) for nonpayment. He wins a money judgment and proceeds to file a judgment against the property in the form of a Judgment Lien.
The judgment that is won in court gets attached to the lien as proof that the creditor is entitled to the lien. In most states, a seller with a judgment lien would not be able to transfer title to a new buyer if he has a judgment lien on his property.
These are also called construction liens. Oftentimes, a contractor or construction company performs work on a home or delivers construction materials and is not paid for his work.
He can file a lien for services performed. Prospective buyers may not be aware of such liens until a lien search is conducted.
A buyer cannot take clear possession of the title until all recorded liens are removed and the underlying obligations are settled.
We recently represented a client in Germany who inherited Florida property from a relative. He thought that the transfer of title to him and his family would proceed smoothly. Not so. A title search on the Florida home revealed that the deceased relative had construction done on the house but never paid the contractor.
The contractor had filed a lien against the property to record his unpaid claim.
Not only was there a first lien from the mortgage bank, but also a lien from the construction company.
Before title to the home could transfer to the heirs, the debt owed to the mortgage company had to be repaid AND the amount owed to the construction company as well.
The laws governing how liens can be filed are not universal; they may vary from state to state. In our case, the deceased relative’s estate was administered in a country different from the one that contained the inherited property.
Our client was so relieved to have UTF on his side; one of our German offices handled the administration of the estate in Germany and our Florida office handled the construction liens and deed transfer.
Our law firm has attorneys who are admitted in both countries and in the state in which the inherited home was located.
Without this network, the client would have had to hire more than one law firm and likely pay more in attorney’s fees.