Real Estate Agent and Trainer, Robert Rico, explains what a Real Estate Property Lien is – from involuntary liens to voluntary liens. Do you want to see more video blogs? Subscribe here!
This week, we are covering a topic that many new agents need to learn more about — the big, scary world of Liens.
What is a Lien, you might ask? Well, at the basis of it, a lien is a financial claim on the house, attached to the title of the property, that affects how it can be sold or transferred. It’s crucial to understand the basic concept of a lien, because some of the bad ones can actually halt a deal. There are a couple of different types of liens, so we want to cover some of the more basic ones here and give you an overview of what to expect when you’re listing a house!
There are two main types of liens – Voluntary and Involuntary. Please note that not ALL liens are necessarily bad, just certain ones. Other ones are totally normal and expected! There are, of course, sharp differences between the two types of liens that we list below.
- Involuntary Liens
An involuntary lien is a lien arising without the owner of the property’s consent. Whether it’s a judgment lien (when the homeowner loses a court case and cannot afford to pay the settlement), a tax lien (when they couldn’t afford their taxes), or a mechanic’s lien (when they didn’t pay for work on the house)…. These are all things to review on the title search and discuss before putting the house on the market. If your homeowners will not or cannot settle them, you could waste a lot of time and effort trying to sell a house that no buyer wants to touch. It’s baggage, and baggage is bad for home deals.
To go into further detail of some of the involuntary liens:
- Mechanic’s Lien
- Tax Lien
If someone does work on a house, and the homeowner refuses to pay, the contractor can place a mechanic’s lien against the title of the house – it’s now “attached” to the title and will come up on any title searches. This lien must be settled with the contractor before the title of the house can be cleanly transferred, which means that (usually) the homeowner needs to come to an agreement with the contractor that will result in the lien getting removed.
Another type of lien that you definitely don’t want to see is a tax lien. This happens when homeowners cannot pay their property taxes, and the government in turn puts a lien on their house so that taxes must be paid before sale. The government ALWAYS gets paid…. So a tax lien could stop a sale in its tracks if the sellers don’t have the funds to pay off the lien. Where would that leave you, the agent? Well, not exactly in a great place – the home wouldn’t sell and you wouldn’t get compensated. If there is a tax lien attached to the title of the house when you do your preliminary search, there will be problems down the line!
You, as the agent, should form good relationships with title representatives (see our blog on your real estate support team!) so that you can quickly, easily pull a preliminary title report on any home you’re thinking of listing. Stay away from tainted title reports – if the homeowners are not willing or able to settle those liens before listing their house, they might not be the best clients to work with. Who knows, they might even try to get out of paying you!
We do want to clarify, however, that not ALL liens are “bad.”
A voluntary lien is simply a claim that one person has over the property of another as security for the payment of a debt, for example, a mortgage lien. With a voluntary lien, it’s pretty much assumed that it will be paid off upon sale of the house, so it’s not something that would stop a deal. It’s normal, it’s a natural part of American homeownership, and the bank is not unhappy when they have thousands of active liens.
One of the biggest and most important liens placed on most properties is the most basic — the mortgage lien. A mortgage is a voluntary lien placed against a piece of property, so that the bank can get compensated if the borrower defaults on their loan. When the buyer is getting a loan, they are basically saying “Ms. Banker, PLEASE place a lien on this house, so that I can buy it with your money!” The banker is agreeing to these terms, because (for the most part) people pay their mortgage payments steadily and securely, providing the bank the steady source of income they desire.
To review, as an agent, you have to be well versed on the different types of liens and what they entail, in terms of settlement and payoff. A mortgage is fine – heck, two mortgages is common nowadays. You just want to stay away from the involuntary liens – judgments, government, or mechanic’s. Settle that junk before the house goes on the MLS! Negotiate if need be; reduce the amounts owed, but pay them off and remove the liens from the title. The clearer the title, the easier to sell the house.
As always, we hope we’ve brought you another nugget of good information this week. The more you know about listings, the easier it will be for you to get listings, and that in turn will make it easier to sell houses and get your commission!
To understand more common real estate terminology, please check out our blog on that here.