You’re here because you want to know if a house can be sold with a lien. We’ll start this article by giving you the answer. Then, we’ll give advice for both sellers and buyers. How would you like to walk away from this article with the knowledge to make an informed decision?
The Answer
You can legally sell a house with an active lien, like a mortgage, if it’s a voluntary lien. You can also legally sell a home with an involuntary lien like a tax, judgment, or contractor’s lien. However, one of three things must happen to complete the sale.
- The escrow company subtracts the money owed to the debtors from the seller’s proceeds to pay off any outstanding liens.
- If the sale proceeds can’t fully pay off the lien, the seller must pay off the lien out of pocket.
- If the seller can’t or won’t pay off the lien, and the buyer still wants the property, they’ll assume responsibility for it.
Lender’s title insurance is required if you use a mortgage to buy a home. Without title insurance, you’ll need to buy the house without financing, through a cash sale.
How Does A Property Lein Work?
A lien is a legal claim or right against a property by a creditor. Creditors use liens to ensure they receive the money they are owed. If the property owner does not pay their debts, a judgment may allow the creditor to seize the property, sell it, and use the proceeds to pay off the debt.
Liens are public records, telling other potential creditors that due to existing claims to the property, they won’t be first in line to get repaid. As a result, it’ll make it challenging to sell the property or secure other forms of financing for a car or business loan.
Things usually happen in this order during the home sale process.
- The buyer makes a formal offer.
- The seller agrees and sends a purchase agreement.
- The buyer signs and makes an earnest money deposit.
- The escrow/title company collects escrow and runs a title search.
The house title shows ownership records of the property, who’s owned it, and any liens on it. The title company needs to clear the title for you to sell the home.
This leads us to our first step, determining the type of lien on the property.
Types Of Property Leins
- IRS Tax Lien: A legal claim by the U.S. government against a taxpayer’s property, including real estate, personal property, and financial assets, due to unpaid taxes. It ensures the government’s priority to collect unpaid taxes.
- Property Tax Lien: This lien is similar to an IRS tax lien, but it addresses property taxes levied by the county.
- A Judgment Lien: A legal claim on a debtor’s property, granted to a creditor when they win a lawsuit for unpaid debts. This lien secures the creditor’s right to compensation if the property is sold or refinanced. It typically remains until the debt is paid or the lien expires.
- HOA Lien: A legal claim on a property by a homeowners’ association (HOA) for unpaid association dues, assessments, or fines. It gives the HOA legal rights to the property if the homeowner fails to pay their dues, potentially leading to foreclosure to recover the owed amount.
- Mechanic’s Lien: A security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. It’s typically used by contractors, subcontractors, and suppliers, and it ensures payment for their work or supplies if the property owner defaults.
- Mortgage Lien: As we discussed, a mortgage lien gives the lender a claim to a property until a debt is paid. Unlike the other six liens on this list, a mortgage lien is voluntary.
Advice To Sellers: It’s in your best interest to find out about any liens on your property before selling. Some buyers will lose interest if public records uncover an active lien on the property that will slow down the sale process.
What To Do About The Lien?
If there’s a lien on your property, you have a few options to release the lien and sell your property.
- Pay it off: If the lien is valid, you should pay what you owe and extinguish the lien. After paying off the balance of your debt in full, the creditor will file a release-of-lien form. Your escrow agent can work the debt into the sale settlement.
- Dispute it: A lien may be filed against you in error or in malice. You can dispute a lien at your county recorder or Secretary of State office. They will release the lien and notify the major credit bureaus if it was filed in error.
- Get a release: If you already paid off the debt, you may need to submit a copy of the lien release to prove that the lien has been satisfied.
- File a title insurance claim: Your title insurer may reimburse you or your lender for covered losses for liens arising before your ownership that were not found in the initial title search.
- Let it expire: Some states have a statute of limitations for property liens. For example, California is ten years while Massachusetts is twenty years. If the claimant doesn’t remove the invalid lien, you can petition the court for a decree to release the lien. You may want to contact an attorney and/or title company.
- Negotiate the debt: If you don’t have enough equity in the property to pay off your debt fully, you could consider hiring an attorney to help you negotiate the debt to a lower amount.
Advice For Buyers: Work With A Professional Title Company
If you’re a buyer reading this article, here’s your key takeaway.
The title company should deal with all of the liens, from conducting a title search after you sign the purchase agreement to paying off the lien after the sale.
If you’re working with a real estate agent, make it very clear to them that you don’t want to buy a property with a lien. You can get into a game of cat and mouse with sellers who can’t pay off the lien but still want you to buy their property. Ensure you get your earnest money deposit back in writing if the deal falls through.
One More Option: Sell To A Real Estate Investor
You’re probably thinking, “Oh man, here comes the sales pitch.”
Many homebuyers don’t want to work with a seller with a lien on their property. You could spend months or years trying to sell a property. All the while, you’re falling into more debt, paying more taxes, etc.
Many homeowners drag their feet until they end up in a situation where they need to sell their home fast. A real estate investor could make you an attractive offer that foregoes you having to pay off your lien or even do a title search (which could take weeks).
If you’re interested in selling your house for cash, we wrote a blog on the complete process.
