Property Title Search: 5 Tips if You Find a Property Lien

Before you apply for a home loan, it’s a smart idea to do a property title search to make sure there are no liens against it. Or rather, that their are none of the wrong kinds of liens on/against the property. Outside of a mortgage, most of them are the wrong kind.

What is a lien, exactly? It is a legal document saying that the owner owes money to the government, or possibly some other legal entity. More importantly, a lien means that the house could be foreclosed on, and taken by, the lien holder! At the very best, it means that whoever owns (or is paying on) the title to the home, also owes a debt.

What is a lien? The exact legal definition isn’t as important as what a lien tells you about a property, and what it tells you is that the owner owes money on that property! A “good” lien would be a mortgage, something that simply means the homeowner is still paying off the home loan that he or she took out to buy the house. “Bad” liens include those placed there by judges and tax authorities.

Technically speaking, the buyer isn’t supposed to be able to sell the home with the latter type of lien on it. But indebted homeowners sometimes “forget” that there is a lien against their home. (To be fair, some of them genuinely do not know.) If you buy a house with a lien on it, you will probably buy some bad debt along with the house (although you could think of it as a free “gift”…).

This isn’t usually a problem: 99 times out of 100, a title search will tell you whether are not their have been liens levied against the property. This is one reasons to do a title search on any property for which you are seeking a loan. (Your own closing title company will probably do this as well–but you’ll save yourself time, money, and grief if you do it yourself first.)

Once you have the title search out of the way, what should you do if you find one or more “bad liens” on the property? You have several options, which we have listed below.

1. Determine What Kind(s) of Lien(s) Are On the Property

A mortgage is a type of lien that allows the homeowner’s lending institution to foreclose on the the property if the owner doesn’t pay at the appointed time each month. Most other liens allow the lien holder to do the same thing.

A property tax lien, for example, is placed on a home when property taxes have not been paid. This lien takes precedence even over a mortgage lien. That means that the holder can foreclose on a house even when owner still owes money to the bank. Many property tax liens are handled at auction, in much the same way collection agencies buy bad debt from credit card companies. The new owner can then foreclose on said home, if the owner does not pay back taxes plus a healthy interest fee.

A judgment lien is placed on a property by a judge, after a creditor has successfully sued the homeowner. How this is then handled can vary from state to state. The important part is, you don’t want to inherit this judgment when you buy your home.

Child support liens and mechanic’s liens are placed when the property owner has failed to pay child support, or failed to pay a contractor who worked on the property. If either one of these goes unpaid for long, the litigious parties can sue and force the home to be sold.

Finally, an IRS lien is much like a judgment lien. But where a creditor may wait for a home to be sold or refinanced before collected their money, the IRS often goes straight for the money, ASAP. If the tax debt isn’t paid shortly after the lien is placed, the IRS can force a home sale in order to receive its money.

These are the most common liens

2. Check to See if The Lien has Expired

Most liens expire after a certain amount of time. This time often depends on the state of residence. Real estate liens in Florida, for example, last 10 years, while personal property liens in that state last for five. They can sometimes be resurrected, but usually are not.

Most importantly for you the home buyer, it could be that the lien is listed, but is no longer effected. This is rare, but does happen. If you’re not sure about the information you’ve found with your property title search, talk to your real estate agent or the home’s title company.

3 Deal With It Like a Professional (Even If You Don’t Want To!)

Keep in mind that the seller may not even know anything about the lien! Unfortunate but all-too-often true. There are undoubtedly some people in the world who will try and get one over on you. But for the purposes of buying a home, it helps to give them the benefit of the doubt (you’re concerned about an effective outcome, not laying blame).

Two cliche phrases that work here are, “Trust, but verify,” and “Stay classy” (the latter meant in a literal, non-sarcastic way). Double-check to see if there are any other issues with the property (it can be helpful to research the history of the property more thoroughly).

Should you speak directly with the seller, be civil. Remember that even if you suspect them of skullduggery, there’s no way to know for sure. Accusing them of something that they didn’t do, could ruin the sale. (For that matter, so can accusing them of something they did do.) Be polite, be classy, and you’ll be the winner here. Just make sure you get a good deal on the house!

4. Use the Lien as Leverage During Negotiations

Your first thought may be, “Well, I’ll just ask them to deduct the amount of the lien from the house. I’ll get a great deal on a home, and take care of the rest later!” You wouldn’t be the first person to look at the situation overly optimistically!

But there are two big problems with this approach. The first is that so much of the situation is out of your control, that clearing up someone else’s debt issues will invariably be more difficult than you think. It can even with you losing the home!

The second problem is that lending institutions simply will not lend to you until the liens are taken care of. Banks and other lenders know the kind of unintended disasters that can happen if you buy a home that has non-mortgage debts against the title.

Even if you can buy the home clear with your own money, in no case should you buy a home that has a lien levied against it! Don’t do this no matter what the current owner promises you. The situation can quickly turn into a disaster once the transaction is finished.

You can still use a property lien to your advantage in negotiations, though. If you’re willing to play hard-ball, you may consider withdrawing your offer, then submitting a new, lower offer. IN this case, however, you’d best make sure there isn’t a line of other buyers waiting to snatch the house out from under you.

You might also simply choose to withdraw your offer and look for another home. This is more than reasonable, since it could take some amount of time for the homeowner to rectify the situation. They can always come back to you once they’ve taken care of their debts. While this won’t work for everyone, some homeowner will be willing to take much less than the original asking price at this point. They might be ready to get rid of the home and be done with it!

5. Withdraw Your Offer

There’s no shame in withdrawing your offer–especially if the other party is simply no help at all. The old saying “There are plenty of other fish in the sea,” applies to homes just like it applies to exes. And it’s still a buyer’s market all over the U.S.

Bonus Tip: Forget Buying the Property–Buy the Lien Instead

It’s risky, but you could just buy the lien from the current lien holder and come at it from that perspective. If the homeowner doesn’t pay off the lien, you can foreclose on the house! It’s not a sure situation, nor will everyone feel comfortable dong so. But it is a possibility.

To do so, however, you will have to go to court. That’s still less expensive than paying full price for the house–assuming the current homeowner doesn’t (legally) fight back.

Luckily, there is a good chance that he or she won’t–obviously they have money problems. But even if they do fight back, well, you’re still probably going to win. You just have to be able to pay the fees up-front–you can’t get a loan for a lawyer in quite the same way you can for a house!

The homeowners only two realistic options here are to foreclose on the home, or pay the lien. You have to keep in mind that they might just decide to pay the lien and keep the home! In that case, though, you will (hopefully) at least have made some money off of the lien.

You could also make it a win-win situation and ask the homeowner to pay only your costs. Since local governments sell tax liens for less than the amount actually owed, this can be a great way for the homeowner to get out of their lien without paying the full amount. (It’s also a lot of trouble to go through–but it may be worthwhile in some situations.)

Some would consider the above options to be risky–and they are. For some buyers, they are also worth contemplating.