Friday, July 28, 2006

Grandpa's Liens Could Cause Bumps in Transaction, Inheritance

Liens on properties have existed probably since the sale of real estate began. A lien is simply "the lender's right to claim the borrower's property in the event the borrower defaults," according to "If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc."

The word itself comes from the Old French, according to It means to tie, bond or constrain. Thus a lien on the property places a constraint on the title which needs to be removed before it can be sold free and clear.

Liens are a necessity of owning a piece of the real estate pie for most people. Your mortgage is a lien; however, there are more liens than just for mortgages. Non-real estate companies and entities can order liens on your property. Creditors, the IRS, subcontractors, even your homeowners association, can all order a lien on your property. provides a more in-depth look at this financial instrument: "[A lien] gives you standing as a creditor to be paid from proceeds if the property is sold or refinanced. Because property to which liens are attached often changes hands or is refinanced, usually a lien will eventually produce enough cash to pay off a judgment, with post-judgment costs and interest."

Liens can take a homeowner by surprise. If you ever have a dispute with a creditor and in the absence of pesky phone calls think they just got tired of chasing you down -- beware. You may have a judgment on your credit and a lien on your property. They're going to get their money, they'll just be patient about it.

Such is the case of a 93-year-old grandfather whose children wrote me regarding his reverse mortgage with a balance of $240,000. When his children researched about selling the house and paying off the mortgage and using the proceeds to pay for assisted living, they found three judgment liens on the property.

The question in an email to me was: "What happens if there is not enough money to pay off all the judgments? How do we get the title cleared for the new buyer of the house? I understand that the judgments are paid in order of date of filing but what do we do with the other judgments -- do they stay with my father or the property?"

Keep in mind, the lien debt has nothing to do with the mortgage amount. The creditors want their money and the lien is just a tool for them to force the landowner to pay up. The liens stay with the property, and liens don't have to be removed before transferring title from one owner to the next, but the purchaser needs to be aware that there may be other debt connected to the house besides the mortgage.

(This is especially true for investors purchasing a house in foreclosure -- title search done early is imperative.)

In the above case, the property can be transferred to the kids easy enough, but then they must still deal with the liens. If they sell the house, the proceeds of the sale will generally pay off the liens in order. Again, warns: "If the new owner wants to transfer the property to someone who will need financing or who wants clear title, however, the lien will have to be cleared up. In the real world, judgment liens tend to get paid off sooner or later."

Published: July 7, 2006

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