What are Liens in Real Estate?

A real estate property lien is a claim against a property to secure debts. The property is used as collateral to compensate the debts if the owner is unable to pay the debt owed.

This information is crucial to know especially if you are an agent. A listing that has a property lien will directly affect how you are able to market and sell the property.

There are three common types of liens and each one has a unique role on a property owner's land: mechanic's lien, voluntary lien, and involuntary lien.

The cleanest way to organize this is that liens are usually voluntary (agreed to by the owner, like a mortgage) or involuntary (imposed by law or a court, like tax or judgment liens), and a mechanic’s lien is typically considered an involuntary/statutory lien.

What is a Mechanic’s Lien

The mechanic’s lien. The name can be misleading. It does not refer to the common definition of someone who fixes cars. But it is related to someone who fixes your home.

This can refer to someone who put a pool in the backyard or a contractor who did remodeling in the house or major construction. The person who has made the improvements is referred to as a “mechanic.” So what happens when the owner decides they are not going to pay the person who has done the work on the home? The worker can place a mechanic’s lien on the property in an effort to get paid.

This can get this done by going to the county recorder’s office.

A mechanic’s lien is typically recorded with the county recorder’s office and shows up as a recorded item on title; the county generally records the document, but it doesn’t “approve” whether the claim is valid, and deadlines/notices vary by state.

This is important when it comes time to sell the property. Buyers will not be as interested in a home that has a lien on it.

What is a Voluntary Lien

A voluntary lien is when the owner agrees to have the lien placed on the home.  They volunteer to accept it. It sounds counterintuitive to the property owner’s interests. So under what circumstance would, the owner agree to a lien?

One example of a voluntary lien is a mortgage.

A mortgage is a lien. In this case, the lender puts a lien against the property’s value. Having the bank place a lien on the property as a mortgage, allows the individual to borrow the money against it to purchase the home. 

A mortgage gives the individual the advantage of homeownership. Since they would benefit, they are more inclined to voluntarily accept this type of lien.

Another example of a voluntary lien would be a home equity loan. The owner is borrowing money against the current worth of the property.

What is an Involuntary Lien

These are liens that homeowners do not want and are unwelcome. They are placed by other parties against the homeowner in an attempt to collect fees or compensation. Here are some examples that would fall under this category as an involuntary lien:

TAX LIEN

One common example of an involuntary lien would be a tax lien.  If you don’t pay your federal income taxes, the government will place a tax lien on your house. This also includes property taxes, special assessments, and state tax liens.

For federal tax liens, paying the tax debt in full is typically the most direct way to remove it, and the IRS generally releases the lien within 30 days after the debt is fully paid.

MECHANIC LIEN

The mechanic lien is also considered an involuntary lien because it’s initiated by a third party. As discussed earlier, it’s filed by a worker or service provider. The file to receive compensation for work completed and the homeowner refusing to pay.

JUDGEMENT LIEN

If a homeowner has an unpaid debt to a creditor, the creditor can file a judgment lien. A judgment lien can also be created when someone wins a lawsuit against you and records the judgment against your property. 

Selling a Property with Liens

Ideally, you don’t want to list a home that has any liens on it, because that can be seen as a negative to potential buyers. But that doesn’t mean you have to refuse the listing.

As an agent, it’s important to know if a property you are about to list has liens taken against it. You can find this information by having your title representative pull a preliminary title report for you.

A preliminary title report is often a snapshot of recorded items the title company found, plus the requirements and exceptions it will use for issuing a title policy. It can help you identify recorded liens and other encumbrances, but it’s not necessarily a complete history of every recorded document.

So what happens if you do find liens listed on the property?

If the liens are voluntary, there are usually no issues when it comes to selling the home. When the property sells, the owner will typically pay them off at closing from the sale proceeds. Again, the most common examples of a voluntary lien would be a mortgage or home equity loan. That said, if there isn’t enough equity to pay off the lien in full, the seller may need lender approval or negotiation to close.

If the liens are involuntary, the seller has to address them. Whether it’s paying it off or coming to a settlement, sellers will want to get that lien resolved. A seller can often list a property with liens, but to close the sale, liens usually must be handled through escrow/title—paid, released, negotiated, bonded around, subordinated, or otherwise resolved depending on the lien type and local rules.

Final Thoughts on Property Liens

IIt’s inevitable, some of the listings you’ll take in your real estate career will have liens on the property. While not all liens are negative, it’s still important as an agent to know and understand the difference between the two.

The preliminary title report will be instrumental in <mark>assessing</mark> the home’s history and letting you know about current liens on the property. If you are working with the seller, you can communicate which liens need to be addressed with urgency.

This knowledge will ultimately help in getting the property sold with no issues, leading to a happy client and another closed escrow.