You find your dream house, but when you run your title search you find out there's a lien against it! Can you still buy it? Should you run for the hills?
We're here to walk you through it.
What to Know BEFORE Buying a House With a Lien Against It
If you're interested in purchasing a home that has a lien on it, there are certain things you need to know before making your offer and especially in advance of closing day.
What Is a Lien On a House?
Property liens are actually pretty easy to understand. Basically, they are a legal claim on an asset (like a house!). A creditor can claim a lien on your house if you owe them money. If you don't pay up, they can receive your home as payment instead.
Here's a Little Bit More Information:
If the creditor in questions wants their lien to hold up in court, then they need to file it through the county records office. If they do it any other way, then it's unlikely that the law will recognize the claim.
Because they have to file liens through the county records office, liens are a matter of public record. This means that anyone can look up a piece of property to see if it has (or has ever had!) a lien filed against it.
However, you can still sleep easy tonight. This is because the county records office does not approve every single lien application that it receives. So, you don't have to worry about someone putting a lien against your home simply out of spite.
Yet, if the lien is valid, once the county records office processes the application, the team will notify the person who owns the home. They'll let them know the exact reason for the lien and how long they have until the creditor repossesses the property.
The final things to remember is that while a lien can impact your credit score, it's attached to your property, not you.
To learn more about different kinds of liens and their impact, you can click here.
Why Would You Want to Buy a House With a Lien On It?
The most common type of lien is a tax lien. Homeowners can receive a tax lien against their home if they neglect to pay their property taxes. As mentioned, liens are always attached to a property, not a person.
So, let's say you find the home of your dreams and are very excited to put an offer in on it. Only then do you discover that it has a tax lien. If you were to go through with purchasing the home, then that tax lien would become your responsibility.
Because of this, it's likely that you friends, family, and real estate agent have all told you that you need to move on from this house. They say that there will be others that don't come with as much drama.
But sometimes, when you've really fallen in love with a home, taking the little bit of extra time and effort to sort through resolving a lien might still be worth it.
Here's how you go about it:
How Do You Buy a House With a Lien on It?
Here is a step-by-step walkthrough of how to buy a house with a lien:
1. Determine the Price of the Lien
The first thing you need to do when you find out that the home that you want to purchase has a lien against it is to discover how much the lien is actually for.
Once you have this figure in front of you, it will be significantly easier for you to determine whether or not you would actually like to go forward with the purchase.
2. Come Up With a Payment Strategy
Once you know the amount of the lien, the next step in the process of purchasing a home that has a lien against it is figuring out how you are going to pay off the lien. This is because the local government will not allow a home with a lien against it to be refinanced or sold.
There are many ways to go about determining the payment strategy for a lien. One of the most common ways is for the person who is selling the home to partner with their creditors.
Sometimes, a seller can negotiate a lien with their creditors, who would be happy to settle for some money rather than no money at all. And, sometimes, the creditors placed the lien in error. If that's the case, the seller needs to partner directly with the creditor to get it cleared before they sell to you.
But sometimes, this is not the case. If the creditors will not budge, the lien is legitimate, and the seller has no funds to release the lien themselves. If this is the case, then it's likely that you, as the buyer, will need to cover the cost of the lien in your offer.
3. Pay Off the Lien
Sometimes, the seller of the home will already have enough equity in their home to make including the lien in the price of the home no big deal. Equity is percentage of your home that you actually own. Your lender owns the rest until you finish paying off your mortgage.
However, sometimes, the lien of the home (when added to the remaining amount on the mortgage) is more than the equity the seller has in their home.
For example, the buyer owes $100,000 on their mortgage and has a tax lien of $25,000, then your offer of $115,000 (even though its competitive!) still isn't enough to take care of the total debt.
What are you supposed to do if this happens to you? Walk away from the sale? You could, but there is still another option.
4. Work With the Title Insurance Company
Property tax liens are notorious for taking precedent as the first lien over the mortgage.
What does this mean? It means that the institution that gave the seller the money to purchase their house in the first place can refuse to allow them to sell it. That is, until the IRS (Internal Revenue Service) agrees to make the property tax lien SECONDARY to the mortgage. This means that the seller has to pay off their mortgage first, making it a financial priority over the lien.
If this happens, the title insurance company (whose job is literally to look into a home's title and make sure it's free and clear i.e. without any liens attached to it) should reach out to the creditors to see if the loan can be cleared. If this is still not possible, then it's likely that the buyer and the seller will have to enter into a short sale.
What Is a Short Sale?
Sometimes, when a homeowner owes more than the home is worth (i.e. the cost of the remaining mortgage payments plus the cost of paying off the lien) and can prove that they are in financial hardship, their lender may approve a special petition for them.
This petition would allow them to legally sell their home for less than the remaining loan amount. You call this a short sale. And sometimes, it can work on homes with liens against them.
To find out more about short sales, please click here. If you would like to know the difference between a short sale (selling a house for less than its worth) and a foreclosure (when the bank takes back the house completely) you can learn more about it here.
What Are the Risks of Buying a House With a Lien On It?
The biggest risk of buying a house with a lien on it is the fact that liens stick with the property, not the person. So, by purchasing the home, you are essentially reliving one person of their immense legal and financial burden and taking it on yourself.
If you love the house enough, it could be worth it. You could also consider buying a piece of property from a friend or family member who is in financial distress to relieve them of the lien. Whatever the reasoning behind your choice, you need to be aware of the financial burden that you are taking on and go into the choice with your eyes wide open.
Once you sign the closing papers, the home (liens and all!) is completely your responsibility.
It's also worth it to mention that sometimes when someone hasn't been paying their creditors, they haven't been taking very good care of their house either. If this is the case, you might find that the home that has the lien against it will also need extensive repairs in order to be truly livable.
Sometimes homeowners might put off these repairs on purpose because they know they are going to lose their house, so they stop taking care of it. But sometimes, it's because they truly cannot afford to maintain their homes as livable.
If this is the case, then you will have to decide whether or not you think the added expense of making repairs to your new home in addition to paying off the lien is worth it.
Should You Work With a Realtor When Purchasing a Home With a Lien On It?
Yes! It's always a better idea to partner with a Realtor when you buy or sell a home. However, it's even more important to partner with a Realtor when you intend to enter into a “complicated” real estate relationship.
Liens can be tricky. Buying or selling property with a lien attached to it can be even trickier. Because of this, it's a good idea to have someone with years of experience in the industry by your side. Your real estate agent can act as a beacon to guide you, a sounding board for your concerns and frustrations, as well as your coach when things get tough.
If you are looking for an agent that will truly have your best interests at heart and not charge you an arm and a leg for their services, then look no farther than Clever.
Clever is a full service, flat fee real estate agency. This means that you'll have someone to walk you through the murky waters of buying a house with a lien against it that won't cost you a fortune.