December 12

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What To Do About Property Liens

By Jeff Coffman

December 12, 2020

liens, subject-to

Estimated reading time: 6 minutes

Investing in real estate has its pros and cons. Real estate can provide flippers, rehabbers, landlords, and wholesalers with a fine living, but it’s not all unicorns and rainbows. There are a whole host of problems that can arise if the investor doesn’t practice proper due diligence well before they sign on the dotted line and fork over their cash. Property liens can be a real buzzkill when they’re discovered and many times can ruin a deal from the get-go. However, liens can also be a very powerful negotiation tool for real estate investors IF he or she knows how to deal with the various kinds of liens associated with real property.

In this post, I’m going to explain how certain liens can, in fact, benefit you as the buyer and show you how leaving a lien in place and purchasing a property ” subject-to” those existing liens can make you a fortune in the long run.

Types of Liens – Voluntary vs. Involuntary

Creditors, such as a mortgage or car lender, can ask borrowers to put up the purchased property as collateral as part of the condition of the loan. Considered a voluntary lien, this type of lien allows the lender to foreclose on the real estate or repossess the vehicle if the borrower fails to make timely payments or breaches (breaks) some other condition.

Not all creditors need a borrower’s consent before getting a lien, however. Some creditors can obtain such rights without your permission. These liens are known as “involuntary liens.” 

Some creditors have the right to attach your property by law. Others can win lien rights in court. Here are some examples of involuntary liens:

  • Judgment Liens – Most unsecured creditors, such as the holders of credit card debt, medical bills, and personal loans, must first file a lawsuit, win the action, and get a money judgment before obtaining lien rights. With the judgment in hand, a judgment creditor can place a judgment lien on your real estate and occasionally on personal property depending on the state in which you live. 
  • Property Tax Liens – Usually, a property tax lien takes priority over all other mortgages or liens on the property, even if the property tax lien was placed on the property after the other liens. If the taxes are not paid, the government can have your property sold to pay the property taxes. The government must follow whatever procedure the state prescribes, and you may have the opportunity to pay the taxes and costs and get your property back even after the “sale.” If you don’t pay your taxes, to protect its mortgage, the lender will usually pay the taxes and add that to your mortgage debt.
  • Child Support Liens – If you owe a lot in child support or alimony, the recipient can put a lien on your real estate. The lien will stay until you pay the support you owe until you sell or refinance your property, or until the recipient forces a lien sale, whichever happens first.
  • Mechanic’s or Materialman’s Liens – Mechanics liens A mechanics lien is the most important type of lien that anyone in the construction industry should familiarize themselves with. Every state has laws giving construction businesses and laborers the right to claim a mechanics lien. Every state also sets an expiration date for mechanics liens. After a foreclosure action has been filed, if the lienholder is successful, the mechanic’s lien is converted to a judgment lien.
  • IRS Liens – If you fail to pay back taxes after receiving notices, the IRS can place a lien on all of your property. If you’re unemployed, self-employed, or sporadically employed and the IRS would have trouble attaching your wages, the IRS might consider this the first line of defense. A creditor with a property lien is in the favorable position of waiting until the owner sells or refinances the house then they’ll get paid automatically. Because the IRS doesn’t like to wait, it might force a sale if the amount you owe is substantial. 
  • Medicare Liens – Oftentimes when an elderly person moves into a nursing or assisted living facility, they don’t have enough money in savings or retirement to afford the facility outright. Many turn to their Medicare benefits to supplement their living expenses while residing in the nursing home or assisted living facility. Medicaid will pick up the tab in many cases, however, an involuntary lien is placed on any real estate the individual may own at the time they were admitted and/or personal assets as well, depending on the value. When the individual passes, the lien stays in place and must be paid off. Even if the property is deeded to another individual, the lien stays on the property. When a case settles or there is a judgment, award, or other payment, the state’s Benefits Coordination & Recovery Center (BCRC) issues a formal demand letter advising the beneficiary and his attorney or other representative of its primary payment responsibility. This letter includes: 1) a summary of conditional payments made by Medicare; 2) the total demand amount; 3) information on applicable waiver and administrative appeal rights.

These are just a few examples of involuntary liens. There are certainly more, but these are the most common that you will see in real estate. 

Lien vs. Encumbrance: What’s the Difference?

A lien represents a monetary claim levied against property to secure payment the settlement of an obligation from the property owner. An encumbrance is a much broader term, referring to any sort of claim against a property. Any lien is an encumbrance, but not all encumbrances are liens.

Can You Buy a House with a Lien On It? YES! You Have Options

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 legal and financial burden and taking it on yourself.

If there is enough equity in the house or you can create enough equity in the house, it could be worth it, but you must be aware that if a creditor discovers that the property has been sold, they could and may choose to foreclose on the property to collect what is due to them. 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.

First, determine what types of liens and judgments are against the property you want to buy. The procedure for each lien is different, and some types of liens cannot be negotiated, but many can be settled for little or no money at all. Start by contacting the lienholder to negotiate for a partial or full release of the lien. Judgments from creditors are rarely set in stone. Smart lienholders will always take something rather than nothing.

Be aware that every state has different laws for the statute of limitations for a lien. Even if the lien expires, in most states, creditors can re-file the lien to extend it. 

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.

Assess The Deal Before You Buy

Of course, you need to be careful if you’re thinking about buying a house with an existing lien, especially if you’re going to take on that lien and be responsible for it. In the Sub2 Empire Apprentice Program, we show our apprentices exactly how to assess each deal with precision and conduct a thorough investigation into every deal they buy. If you would like to know more about the Sub2 Empire Apprentice Program, visit sub2empire.com or join our Facebook Group ” Subject-To Real Estate Investing Mastery” .

Happy investing!

 

Jeff Coffman

About the author

Jeff Coffman is a real estate investor, creative finance expert, coach and mentor to aspiring real estate entrepreneurs across the United States. Jeff provides a dynamic mix of traditional investing advice and creative real estate acquisitions strategies like "Subject-To" and Lease-Options to help investors like you build and grow your brands and businesses.

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