There are few factors in real estate investing that can impact a property purchase like a lien, and yet you won’t hear investors talk about liens very often. Instead, they focus on finding properties that are likely to sell for below-market value. However, it doesn’t do you much good to know how to find and negotiate with motivated sellers if you have no idea what a lien is, how it can derail a property purchase, and what you can do about it.
So to help you avoid the heartbreak of finding the perfect property only to discover you can’t buy it, here’s how to find liens on a property before you make an offer.
What is a lien?
A lien is a legal claim that’s held against an asset that’s been used as collateral for a debt. In other words, it gives a lender a claim to a property to ensure that a debtor pays back a debt. It also gives a creditor the right to stop a property from selling or to seize it and sell it to pay off a debt, if necessary.
While this may sound extreme, it’s more common than you might think. When you secure a mortgage to buy a property, you’re voluntarily entering into a lien. If you fail to pay your mortgage payments, the mortgage lender will repossess the house and sell it to recover the money they lent you.
Of course, there are other types of liens that people don’t voluntarily enter into, and these have a significant impact on how property owners relate to their assets, including any real estate they own.
For example, if an individual or business loses a civil lawsuit, the court can place a judgment lien against them and their assets to ensure payment. If they fall too far behind on their property taxes, the local tax office or the IRS can place a tax lien on their assets to ensure all back taxes are paid.
Another common example is a lien placed as a result of a bail bond. If someone bails themselves or an acquaintance out of jail and uses their home as collateral, the bond company will place a lien on the property. The owner can’t sell that property until the lien is released or the debt is repaid.
How does a property lien impact a real estate investment?
The general rule of thumb is that if a property owner has enough equity in the property, they can sell it to pay off their lien. This is how most people settle their mortgage liens. This means that in some cases, liens are motivating factors that create investment opportunities. If someone has high equity in their property, but they have a lien that’s threatening them with foreclosure, they may need to sell at a discount to pay off the debt. In these cases, a lien on a property can be beneficial to a real estate investor.
However, this isn’t always the case. If a property owner doesn’t have enough equity to cover the debt, they can’t sell unless someone pays an additional sum equal to the remaining balance. When it comes to mortgage liens, this is usually only an issue if the economy is dipping or a house is severely neglected and the owner is upside down, meaning they owe more than the property is worth. The problem is that multiple liens can stack up, meaning the debt owed on a property can be nearly equal to or greater than what the house is worth.
Imagine a $225,000 home that has a mortgage balance of $150,000 and another lien of $20,000. To buy the property, you would need to pay at least $170,000 just for the owner to settle the liens.
Now imagine a $175,000 house with a mortgage balance of $147,000 and a $30,000 lien. For someone to buy this house, they would have to pay at least $2,000 over its after repair value.
If every distressed property had a yard sign announcing liens, this wouldn’t be a problem. Investors could simply avoid these houses. However, many investors go through the entire purchase process only for the title company to discover a lien at the last moment. Title insurance can protect investors if this happens, but checking properties for liens from the start is the best course of action.
How do I find out if a property has a lien?
To avoid wasting your time on properties you can’t buy, you should do a lien search before signing a real estate contract. There are several ways to do this.
The first is to use your state or county records office. The local municipality will likely have a website you can search for owners’ names or property addresses. If there are any liens you should be concerned about, you’ll find them there.
Of course, this can be a very manual and time-consuming process. Sometimes, the names you have aren’t the names listed on public documents or your county clerk might be missing some vital information. To save time and quickly find the information you’re looking for, you should use real estate lead generation software. Not only will the right platform compile the information you need, but you won’t even have to search for it. You’ll be able to use filters that list properties with liens so you can easily identify them.
If you’re using a real estate platform with quality data, then learning more about a lien as simple as viewing the property details. From here you can see details about the lien including document numbers, judgment amounts, amount owed, and more. It’s by far the easiest way to find out about liens before hiring a title company and learning that a purchase can’t go through.
As a real estate investor, properties with liens present two possible situations: an opportunity to buy real estate from a motivated seller or an unforeseen roadblock to a promising deal.
However, liens don’t have to catch you by surprise and derail your plans. You can use local and state public record searches or you can use a real estate lead generation platform like BatchLeads to quickly filter out all the properties that have liens from your searches or lead lists.
Liens are an important part of borrowing money, but poor financial management can cause them to become a homeowner’s worst nightmare. Keep them from turning against you by identifying any liens on properties you’re interested in as soon as you develop an interest in them. With modern technology, you don’t ever have to be caught off-guard again.