How Liens Can Affect Your Property Purchase

How Liens Can Affect Your Property Purchase

Simply put, liens are financial claims against property that are intended to secure a debt or obligation.  If discovered during the course of completing a real estate transaction, a lien can introduce significant complications.  A cloud on the property title may be the last thing you want to encounter in a property transaction. Much as it sounds, the cloud develops because the title has a defect or encumbrance-any claim, liability or lien attached to property that lessens its value. While liens can signal bad news, it's important to note that they're also quite common, at least in the form of mortgage instruments. A mortgage is the most common type of encumbrance or lien, entered voluntarily by lender and debtor and specific only to a particular property. However, if the mortgage lien is foreclosed and the proceeds from the sale do not cover the remaining obligation, the deficiency-when recorded- becomes a general lien on all of the debtor's property. General liens also can result from court orders or property tax laws. In a lawsuit, for example, a judgment lien is the court's final order that the defendant pay the plaintiff an amount of money. To collect on the judgment, the court issues a legal document, a writ of execution, requiring the sheriff to orchestrate the sale of enough of the debtor's general property to settle the judgment. Typically the lien only includes property located in the county where the judgment is rendered; notices of the lien or claim-or Lis Pendens-must be filed in other counties in which the creditor wishes to extend the lien.

 

Property tax liens are another type of general claim imposed against a property holder for nonpayment of taxes. This lien remains until the taxes are paid, even if the property is purchased or transferred to another party. And typically, a local tax lien for nonpayment of property taxes takes priority over all other liens, regardless of when they were recorded. Especially when dealing with developers, new construction or rehab projects, a mechanic's lien may come into play. Used to secure payment for those providing labor, services or materials required during construction, repair or improvement of property, a mechanic's lien is a statutory measure that is specific to the property on which the work was performed. It is meant to protect suppliers and their role in enhancing the value of a property. In order for a contractor to be entitled to a mechanic's lien, the work must have an express or implied contract, and it is the mechanic's responsibility to have the lien notarized and filed within a pre-determined time period. Property owners may request lien waivers from contractors, subcontractors and suppliers, and many states do not allow unlicensed contractors to file a mechanic's lien. However, if a mechanic's lien is granted and not satisfied, the lienholder can force the sale of the property.

 


 

Priority of Liens

 

Some states grant all mechanic's liens equal priority; others assign different conditions based on:

 

  • Date the contractor started work
  • Date first work was performed
  • Date on construction contract
  • Date lien was filed

 

In general, lien procedure is based on state law, which is why it's important that liens be filed in a timely manner in the county in which they occur. Liens do not transfer title (until foreclosure, the debtor always retains the title), and unless a foreclosure suit is filed, some statutory liens (e.g., mechanic's liens and judgments) become unenforceable if enough time lapses between the time the issue originated and when it was recorded. The first recorded lien generally takes precedence over liens placed in the public record at later dates, except in certain cases such as property taxes and special assessments, which take priority over other liens no matter when they were recorded. Again, because liens are considered an encumbrance on the property title, the lienor should plan to satisfy the lien as soon as possible in order to clear the property title and make it marketable once more.

 

Regarding liens in particular and real estate law in general, it's important to note that laws and regulations vary from state to state.

Contact Information

Photo of Laurel Sweeney Real Estate
Laurel Sweeney
Berkshire Hathaway HomeServices Nutshell Realty
1209 State Route 213, PO Box 452
High Falls NY 12440
Office: 845-687-2200
Toll Free 877-468-5783
Fax: 845-687-4162

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