A lien in real estate refers to a legal claim a creditor has over a property as security for the repayment of a debt. Are you still confused? Keep reading, and we will help you understand “What is a lien?” so you can explain the concept to your future real estate clients.
Understanding Property Liens
Read this scenario to understand how liens can affect a real estate transaction.
Mrs. Johnson is an older woman who owns her own home. Even though she has no mortgage, she got behind on her property taxes and owes back taxes for three years. She decides to sell her house, but there is a tax lien against her home for her unpaid property taxes. Mrs. Johnson can still sell her home. However, the money she earns from the sale must first go to the local government agency to pay her taxes.
A tax lien is just one type of lien in real estate. If a lien is on a home, it must be addressed and released before a real estate transaction can be completed.
What Is the Purpose of a Lien?
Liens serve as a mechanism to secure debts against real estate properties. They provide legal recourse to creditors whose debts are not paid.
For a lien to be in place, a creditor must file and be approved through a county records office. Lien procedures and guidelines vary by state.
What Are the Types of Liens in Real Estate?
Several types of liens can be placed against a property.
1. Mortgage lien
The most common type of lien is a mortgage lien. When a person takes out a mortgage to purchase a home, they typically use the property as collateral. The borrower must understand that if they fail to repay the loan, the lender can foreclose on the property to recover the outstanding debt.
2. Property tax lien
A tax lien is imposed by the local government when property taxes are not paid. Tax liens take precedence over other liens, which means that tax liens are paid first when a property is sold.
3. Federal tax lien
The IRS can put a federal tax lien on your property if you are behind on your federal income taxes.
4. Mechanic’s lien
Contractors who have provided labor or materials for property improvements may file a mechanic’s lien if they are not paid.
5. Judgment lien
If a person does not pay a debt and that creditor takes the debtor to court, the court can place a lien on the debtor’s property. The type of lien resulting from a court decision is called a judgment lien.
6. Homeowners’ association (HOA) lien
Homeowners’ associations can place liens on properties when homeowners fail to pay dues, fees, or fines related to the association.
How Does a Lien Work?
How does anyone know if there’s a lien against a property? If there is a lien, how does a sale go through? Here’s how the lien process works.
1. The lien is established.
A lien is established when there is a debt owed by a property owner to a creditor. That creditor may include a mortgage lender, tax authority, contractor, HOA, or another party (or multiple parties.)
2. The lien is recorded.
A lien is typically recorded in public records, which serves as a notice to anyone interested in buying the property. Recording the lien helps protect the creditor’s interest in the property.
It’s important to note that if there are multiple liens against a property, some take priority over others. For example, tax liens generally have priority over other types of liens. Otherwise, the lien may be determined by the date it was recorded.
3. The lien is enforced.
If the debt is not paid, a creditor can enforce the lien. This means a mortgage company may foreclose on a property. In the case of other types of liens, the creditor may seize the property or force its sale to recover the amount owed.
4. The lien is satisfied.
Finally, once the debt is paid or renegotiated, the lien is released. For a lien to be officially released, the necessary paperwork must be filed to remove the lien from the property’s title. If a title to a property has no lien, it is said to be a “clear title.”
Please understand that each jurisdiction has its own rules and regulations for government property liens.
Property Liens and Real Estate Agents
Liens can affect real estate transactions. They are more common with short sales – or a sale where the price of the home won’t cover what the owner owes on the house and the closing costs. At a minimum, a lien will delay a sale.
When you take your real estate pre-licensing courses with Colibri Real Estate, you’ll learn more about liens, including the laws regarding liens in your state.
Colibri Real Estate is a premier provider of online real estate courses. We have helped over 500,000 real estate professionals achieve their licensing goals and can help you, too!
Start the licensing process by learning how to become a real estate agent in your state. Then, when you are ready, sign up for pre-licensing courses with Colibri. Within just a few months, you’ll be able to get started with your new career.