Property Liens Can Stop Your Home Sale
What is a Property Lien?Can a lien against your property stop the sale? It sure can – dead in its tracks!
If you are planning on selling your home, it is in your best interest to learn about property liens—what they are, how they can affect your sale and whether your property has any claims against it.
Too many homeowners start the sales process without considering property liens and wind up hitting roadblocks to their sale.
A lien is a recorded claim that requires you to pay money you owe before you can sell your property.
Another way of thinking about a lien is an encumbrance against the property. It is a blemish on the title that will need to be corrected before the sale can take place.
An encumbrance against a property is a claim by an individual or entity that speaks to justify specific rights. In Massachusetts, the Homestead Protection Act is a form of protection that most attorneys recommend at home closings.
The Massachusetts declaration of homestead is a form of insurance that protects the equity in your property for up to $500,000 in the event a lawsuit is filed against you.
So if you are sued, $500,000 of the equity in your home could not be touched by an attachment or lien and subsequent levy on the execution of sale.
The Homestead act protects you from creditors who want to get at your equity to repay the debts you owe them.
If you don’t have a declaration of homestead, creditors who have a lien against your property can foreclose. They will be able to auction your house to get the money you owe them.
This isn’t to say because you have homestead protection you should willfully try to screw someone out of money. Far from it! I mention homestead protection because it is one of the best insurance policies you can have when buying a house.
There are a surprising number of ways that a lien can be claimed against your property. Some of these include:
A property lien is by far the most common type of encumbrance homeowners deal with. When you take out a mortgage to buy your home, the lender will always put a lien on the property. The lender expects you to pay off your mortgage before you can sell the property, which makes sense.
In a standard home sale where the owner has a mortgage, the first party paid from the money delivered by the buyer is the lender. After the mortgage debt is addressed, the owner gets to keep the rest of the payment (with the exception of some costs).
After a sale takes place, the attorney representing the lender is supposed to discharge the mortgage. Over the many years I have been selling real estate, I’ve seen many occasions where a lawyer has not done their job and released the mortgage,
Guess what happens? If you think this comes up in a title search, you would be 100 percent correct. The attorneys involved in the current sale are left to clean up the mess. For your sale to proceed the mortgage lien needs to be discharged.
The property lien the lender has on your home also allows them to move forward with foreclosure and the seizure of the property if you stop paying your mortgage.
When selling a house, it is also important to disclose if you know there is a property lien that could prevent the sale from happening. There is a myriad of things discussed in the previous reference that should be disclosed.
Anything that could prevent a home sale should be disclosed upfront.
A mechanics lien is another type of lien that contractors will use to try and get their payment. Let’s say you decide to put on an addition to your home and hire a general contractor to do the work.
During the course of construction, you decide that the new bathroom did not come out the way you expected it to. You are displeased because it’s not exactly what you thought you would be getting.
You decide to withhold payment. The contractor, on the other hand, does not agree with you. He hears rumors that you have been transferred to another state and will be selling your home.
To protect his interests, he files a mechanics lien that is recorded at the local registry of deeds. The claim prevents you from selling the home until he gets paid or a resolution is agreed upon.
Another situation that could occur is finding out the contractor you hired never pulled a permit for the construction on your home. Obviously, a good reason to withhold payment.
This is why it is crucial get lien waivers when having contractors work on your home. By getting signed lien waivers, the contractor waives their right to file a mechanics lien in the future.
It is usually easiest to work out a deal with the contractor rather than wait for him or her to file the lien or try to take you to court.
Even if you do not wind up going to court, having the lien on record will put a halt to your home sale until you resolve the debt and have the lien removed.
Uniform Commercial Code 1 Lien
When you are a co-op owner the lender will have a different type of lien on your property. Referred to as a UCC 1 lien, it gives the lender essentially the same rights as a property lien does.
The lender can prevent the sale of your property until the debt is paid and can initiate foreclosure if the mortgage payments stop coming in.
UCC-1 filings can either be done for specific assets—such as a commercial property or piece of equipment. They can also be given as a blanket lien covering all of the borrower’s assets.
A Divorce Lien
A divorce lien will not prevent a house sale. It is one of the few situations where the lien is actually intentional and part of the home sale process.
With a divorce lien, one of the parties keeps the house, and the other gets a note and mortgage secured by the property. In other words, one gets real estate, and the other gets paper. This is certainly an option that can come up when selling a house while getting divorced.
In this situation, the spouse who keeps the home has the same familiar environment for him or herself and the children. The children don’t have to change schools, and there are no divorce relocation costs. Moving is always expensive.
The spouse living in the home retains a fair share of the equity with the hope that the price of the house continues to rise. There is an obligation to pay the departing spouse according to an agreed-upon schedule.
The agreement would be the divorce lien. The ins and outs of a divorce lien are spelled out in great detail in this outstanding article from Family Lawyer Magazine.
Homeowners Association Lien
If you are part of a homeowners association and become delinquent with your monthly or yearly dues, the association can put a lien on your property. This type of lien is referred to as a homeowners association lien.
Nearly all homeowners associations have the power to place a lien on the homeowner’s property if they become delinquent in paying the monthly fees and any special assessments.
When an HOA homeowner becomes delinquent on the assessments, a lien will typically automatically attach to that owner’s property, usually as of the date the assessments became due.
In some cases, the HOA will record a lien with the local registry of deeds to provide public notice that the encumbrance exists, regardless of whether recording it is required.
You should always understand what you are getting into when buying where a homeowners association exists.
The IRS also has the power to place a lien on your property if you fail to pay your taxes. Like all liens, it is designed to force you to pay the debt before you can sell your property.
The lien will include the amount of taxes you owe as well as the penalties and interest that have accrued.
These kinds of liens can come from more than just income taxes, too—including school taxes, sales taxes, estate taxes, payroll taxes and any other type of tax you might owe. You don’t want this kind of lien on your property!
Home Equity Line of Credit Liens
A lot of homeowners are unaware that taking out a second mortgage or a home equity line of credit can result in a lien against their property. Failing to pay what you owe can cause the lender to foreclose on your property.
These are very commons liens against a property. When you go to sell your house, they are paid off at closing. This is not the kind of lien a homeowner should worry about.
Tickets (Parking, Etc.)
Another big surprise can come from a lien due to violations like parking tickets. Failure to pay your parking tickets or tickets for moving violations can lead to a lien placed on your property. These kinds of claims do not typically result in foreclosure proceedings, but they can still cause a hiccup in the sale when they are found through a title search.
You will need to pay the tickets out of your proceeds for the sale to go through.
A lost lawsuit is another event that can result in a lien being placed on your home. You will need to pay the debt owed for the lawsuit before you can sell the property. Legal action, of course, can happen for any number of reasons.
See what you need to know about judgment liens in this excellent resource from NOLO.
Property Tax Liens
Most people pay their property taxes, but there are situations where these payments get missed in the shuffle.
One common reason is that homeowners are used to the lender paying the property taxes as part of the escrow process, but then find themselves responsible for the taxes once they pay off their mortgage.
It is easy to miss the payments when you are not used to paying them. Another way could be fighting a high property tax and just conveniently forgetting to pay. A little wink and nod on this one.
The municipality that you pay property taxes to has the option of selling a tax lien to another party that can try to enforce the lien. The third-party may push to have you pay the property tax debt, or it may sell the lien to yet another party.
Regardless of who has the lien, if you try to sell your home without addressing the debt, then you will run into problems.
Many homeowners sign agreements with home contractors without reading the fine print. Sometimes these agreements include a section that gives the contractor the right to place a lien on the property if the contractor is not paid in full.
A contractor lien is just another description for a mechanics lien.
Things get more complicated in these situations because contractors usually don’t hold on to the lien. Instead of trying to get the money from you they will sell the lien so they can get their money immediately.
That leads to a third-party coming to collect the debt from you and complications with your home sale.
Having credit card debt is incredibly common, but fortunately, credit card companies cannot put a lien on your home unless they go to a lot of trouble to do so. For them to get a lien, they first need to have a court decide a judgment against you.
It is possible for creditors to place a lien on your home if you agree to it at the beginning, such as if you give the creditor written authorization when you try to get a loan. Over the course of my thirty-one years selling real estate, surprisingly I have seen some credit liens.
Back when short sales were in vogue, I would do a lot of these kind of transactions representing sellers who needed financial assistance. While going through the process, quite a few of these sellers had run up some credit card debt.
The attorney I worked with would have to negotiate a settlement in these circumstances.
Environmental Control Board Violations
Yes, it is possible to have a lien placed on your home if you fail to meet the requirements of your local environmental control board—like if you do not fix a potential hazard they have identified, or possibly even if you don’t clean up your property to meet the board’s standards.
This type of lien is far less common but worth mentioning none the less.
You Can Get Liens Removed
If you have a lien on your home and need to get it removed, you can do it. The process of getting a lien removed is relatively simple. You just have to pay the debt that leads to the lien. Once you have paid the debt, you need to get a “letter of satisfaction” from the party that filed the lien.
You need to take the letter to your local county clerk and ask for the lien to be removed. You will also want to make copies of the letter and make sure that the three major credit reporting agencies get a copy.
If you have no interest in doing this kind of work, then hire a local real estate attorney that deals with lien removal.
You May Also Be Able to Make a Deal
While it may seem simple enough to pay a debt and have a lien removed, the fact is that some debts are too big to pay—or you don’t really agree that you should have to pay them. When you find yourself in this situation, try talking with the party that filed the lien and see if you can make a deal.
Many will agree to remove a lien if you agree to payments or to pay part of the debt. Sometimes you can’t get blood out of a stone. Many smart creditors realize this after doing a bit of research. If that is the situation, you could end up paying pennies on the dollar to get the liens dealt with.
Hopefully, you have enjoyed the advice on how to deal with a lien when selling your home. It is highly advisable in situations such as these to hire a qualified real estate attorney.