what is a property lien

What Is a Property Lien? An Unpaid Debt That Could Trip Up Your Home Sale

One factor that can have an influence on how long a property takes to exchange hands is the presence of liens on a property. In the US, property liens account for 11% of delays with transferring ownership of the house – only loan issues, appraisal issues, and issues pertaining to maintenance of the property are bigger hassles than liens.

What are property liens?

If you have unpaid debt of any kind, this can lead the creditors that you owe money to place a lien on your assets. As your home is probably the largest asset you own, property liens are a relatively common way of satisfying debt or other financial obligations.

Creditors place liens on property to secure the debt you own them. Liens can give creditors the legal right to seize your property and sell it in order to obtain the money you own them, and may hinder property owners from selling their home until the debt they are owed has been settled.

Liens are often a standard part of acquiring certain assets like property or vehicles, and written agreements establish an agreement between the lender and the buyer that the debt incurred will be settled. In other cases, liens may be placed on property by a court order as a result of legal action. For example, if a person does not stick to a childcare maintenance agreement, a lien may be placed on their property in order to secure the outstanding amount of money.  

Property liens can greatly delay the sale of a home, as they completely stall the selling process. The property can only be sold once the lien has been paid off, settled, or once an alternative agreement has been reached with the creditor in question or with the interested buyer.

Types of liens on houses

Various types of liens on houses exist, depending on the type of debt incurred by the owner of the house. Here are a few of the most common types of property liens.

Mechanic’s lien

Also called construction liens, mechanic’s liens are filed by contractors and other artisans when they aren’t paid in full for work that has been done on the property. These workmen then file a lien on the property as insurance, in order to make sure that they get paid.  

Mechanic’s liens may be filed by any type of repair or construction specialists, like painters, plumbers, carpenters and any type of contractors.

In some unfortunate instances, prospective property sellers only realise there is a lien on their property when they want to sell – and in the case of mechanic’s liens, they might not even always be responsible for the money owed. One example of this is when a contractor has not paid subcontractors working on a property, and that company decides to file a lien on the home. Mechanic’s liens can be filed by contractors and subcontractors who work on the property.

Mechanic’s liens may refer to labour or material improvements made to the property, and will appear in public property records once they are filed. Prospective homebuyers will immediately see that a lien has been placed on the property, and will have to agree to buy the property, subject to the contractor’s lien. Of course, very few buyers would be interested in going this route, and may rather demand that the lien is paid before they agree to the sale.

Judgment lien

If a homeowner has been involved in a court case where they lost and a money judgement was made against them, they may be liable to have a judgment lien placed on their property.

Judgment liens can be imposed by the party who won the lawsuit in question, or by an attorney, in a case where the bill for their legal services has not been settled. Whoever they are, the plaintiff who has obtained the monetary judgment lien will be known as the judgment creditor, while the homeowner will be referred to as the judgment debtor.

Because a judgment lien is attached to their property without the owner’s agreement or consent, judgment liens are considered non-consensual liens.

Tax lien

Failure to pay taxes could lead to a tax lien being filed on a property. When taxes are in arrears, the Australian Taxation Office will inform a person of the outstanding amount that is owed. Should a person not respond to this demand for payment, the ATO can place a tax lien on that person’s assets, including placing a lien on their property. Tax debt generally differs from other types of debt in that it is not written off when a person is declared bankrupt.

Tax liens may be placed on someone’s home due to non-payment of income tax or non-payment of taxes related to the property itself. Like with all other types of liens, the simplest way of getting rid of tax liens is to settle the amount that is in arrears, or to try and come to a different payment agreement with the ATO or the municipality that the taxes are owed to.

How does a lien affect a real estate transaction?

When prospective buyers sign a sales agreement with sellers, the lender they are using to secure financing on the property will perform a search to enquire whether any liens have been placed on the particular property. If a lien on the property does show up, the transaction will temporarily be put on hold until such time as the lien has been paid of or settled in another way.

This legal claim against the property will remain in effect until an arrangement for repayment has been made, and the seller will not be able to sell the property until this has been done.

Of course, a home seller may refuse to settle the property lien, but that does not mean that the transaction on the property will be able to go through. On the buyer’s behalf, there are two options. First, the existence of a lien on the property amounts to a breach of contract and, as such, the buyer is entitled to walk away from the sale of the property with their deposit still intact. Alternatively, the buyer may decide to accept the financial responsibility on the lien.

If the sale is in cash and is being conducted without mortgage support from a lender, the home seller and prospective buyer (perhaps in conjunction with their respective real estate agents) may decide to come to their own agreement in order to settle the amount owed on the lien.

What to do if your property is subject to a lien

Property owners who are considering selling their property should take care to make sure whether any liens or judgments against the property exist. If there are liens on the home, the owner should keenly evaluate the liens, making sure what exactly is owed.  If it is clear that the lien cannot be settled (this is the quickest and easiest way to get this hassle out of the way and move the sale along), you should definitely try to enlist the services of a real estate agent who has experience of selling properties with liens to help you sell.

While some buyers are willing to acquire property with standing liens, most buyers will be wary to do so. However, if they really want the property, they might be willing to discuss buying the property with the lien and arranging some kind of payment agreement with the seller.

Also, don’t hesitate to communicate with the creditor that has placed the lien on your property. Creditors are often willing to settle for an amount that is less than the amount that is actually owed, as it ensures that they do receive some payment, instead of having to wait a significant amount of time.

Remember: while it is not impossible to sell a property that has had a lien placed upon it, it is much more difficult to sell. Buyers are typically looking for the best deal, and acquiring a property that comes with debt attached is nobody’s ideal situation.

Conclusion

Property liens can be an annoying spoke in the wheels for property sellers, especially when they are looking to move the property quickly. Property sellers who put their home on the market knowing that there is a lien on it can expect to have their home spend a lot more time on the market than it would spend without the debt. The best way forward is to try and settle the outstanding amount as soon as possible.

If you do decide to sell your home with the lien, though, you’ll have to have an expert of the property market on your side. To find a real estate agent that understands how to sell with liens, contact Perfect Agent today, and let us help you find an agent that is qualified and experienced to cater to your specific needs. Still looking for someone you can trust? Simply fill out a quick questionnaire.




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