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Selling a House with a Lien on It
While selling a house on the real estate market is already challenging as it is, the process is even made more complex when the house is attached to a lien. Many deals have been delayed and some are even canceled due to this issue; thus, you really have to settle all existing liens before proceeding to a home sale.
Before selling a house with a lien, you must first evaluate if the lien is legitimate. If it is, settle the lien through payoff, transfer, or negotiating with the creditor. Once this is done, obtain a lien termination and proceed with listing the property. In case you do not have enough money to settle the lien, you can pay it off at closing using the sale proceeds.
We understand how stressful it is to deal with a lien on top of a home sale. To help you navigate through the complex process, read this comprehensive guide about selling a house with a lien!
What is a Lien?
A lien is a creditor's legal claim against a property. It is a public record filed to a county recorder's office and is usually granted by the court or voluntarily granted by the owner.
Some of the creditors that may hold a lien on a property include mortgage lenders, credit card companies, contractors, ex-spouses, and many others.
According to Forbes, if an individual has a public record or lien placed on their house, they won't have a clear property titlewhich can lead to challenges in selling the house, subdividing it, and even getting a mortgage.
They can only proceed with these actions when the lien is settled-- this is typically how property liens work.
Types of Property Liens
Identifying the type of property lien attached to your house is the first step in settling it and preparing the house for sale.
In general, some liens are granted by municipal government agencies or courts, while some are voluntary and are granted by the house owner.
Here are the seven most common types of property liens you should know about.
Mortgage liens are the most common type of lien placed on a property. Property owners voluntarily grant mortgage liens to lenders during the loan's closing.
Generally, a mortgage lien is a claim to a property that also serves as security or collateral for a mortgage. If the property owner stops paying the mortgage, the lender can sell the owner's house to recoup the losses.
Property Tax Lien
A property tax lien is taken against a property when an owner can't pay for real estate or property taxes.
If the property owner fails to settle the property tax lien, the government would have the right to sell the house to recoup unpaid property taxes, penalties, and interests.
In case the property has a lot of liens, property tax liens take priority among the others.
When property owners do not pay their income taxes, the federal government can file an Internal Revenue Service lien or IRS lien against their property.
When the IRS liens aren't paid, the government can foreclose the property to satisfy the unpaid taxes of the homeowner.
Homeowner's Association (HOA) Lien
The homeowner's association lien or HOA lien is granted to a property if the owner fails to pay for the fees and assessments required by the HOA. This isn't as daunting as the tax liens discussed above.
The HOA usually collects fees or dues to cover security, landscaping, and maintenance. They also ask for funding when they need to do a special assessment of a community-owned property for improvement.
If a homeowner fails to pay all these, the HOA may initiate the property's foreclosure even if the owner's mortgage payments are up to date.
A mechanic's lien (also called construction lien, designer lien, or materialman lien) is filed against a property when a homeowner fails to pay the contractors for their work.
A mechanics lien also includes debt to designers, engineers, and architects that the property owner employed for the service.
A judgment lien, also called a judicial lien, is recorded against a property if its owner lost a lawsuit and failed to compensate the winner.
In other words, if someone gets sued, lost on the court judgment, and is unable to pay, the winning party can file a judgment lien against his assets, including real estate.
Child Support and Alimony Lien
Child support or alimony lien is filed against a house when the property owner fails to pay for child support that the local court ordered. With this lien, the court may still allow the owner to sell the property; however, the process of court approval isn't that fast.
Can You Sell a House with a Lien on it?
Yes. You can sell a property with a lien. However, unless it's a mortgage lien, the lien should be addressed before the closing process begins to avoid delays.
When a house with a lien is put on sale, the title company requires the property owner to satisfy the existing lien so its qualified buyer will have a clean property title. This means if you aren't able to fix the lien issues filed in the county clerk's office, the sale will not close.
There are cases, however, when it is allowed to use the home sale proceeds to pay for the active property lien. Talk to the real estate agent, buyer, and lien holder about the possibility of adding a clause in the closing agreement about paying the lien through the proceeds.
Note that this is only suggested if you'll make enough money by selling the house to cover most or all of the lien.
If it is difficult to find a buyer that will take your house with a property lien due to risk of closing delays or the sale falling through, you can try selling the property to a cash buyer. We'll dive deeper into this in the latter part of this article.
How Do Mortgage Liens and Other Legitimate Liens Impact a Home Sale?
Not all property liens are the same, so their impact may differ. However, when you sell a house with a lien, expect a few advantages and disadvantages.
Let's take a look at the possible impacts of a lien on selling a property.
A Lien Can Attract Cash Buyers
This may come as a surprise, but having a lien on your house can attract certain buyers, such as real estate investors, flippers, and cash buyers.
These buyers are really motivated and they prefer to work out a deal to pay off the lien and buy the house directly from the owner than buying at auctions.
Also, most buyers know that when they buy a house from an auction, they won't have the opportunity to see the interior of the house before they commit to the sale.
Selling to Retail Buyers Can Take Longer
When a property is attached to a lien, selling it can be more complicated; thus, it would take longer to sell than standard real estate.
This is especially true if some of the property liens were only discovered during the closing process and they include a tax lien, an IRS lien due to unpaid federal taxes, and some other liens that are hard to settle. These may even prevent you from listing the property completely.
There's also the fact that most mortgage lenders refuse to provide a loan when the property being purchased is on a lien. All these may totally put off potential retail buyers.
You May Net Less Money
If you plan to sell your property with a lien, you commonly have two main options: settle the lien by paying or deduct the payment for the lien on the sales proceeds.
Since it is next to impossible to find a buyer that will shoulder the lien for you, these two options are all you've got. If the unpaid debt is too huge and you can't pay it off, you would need to sell the property and pay for the lien with the proceeds.
This may mean you'll get close to nothing after selling a property with a lien. Remember that aside from settling the lien, you also have to pay for the closing costs, agent fees, and a title search if working with a real estate agent.
If selling to a cash buying company, you only have to settle the lien-- the cash buyer will cover all closing costs and fees.
You'll Pay for Professional Assistance
Selling a house with a lien can get complicated at the closing table, especially if you're dealing with a lien for property taxes or IRS issues. We recommend getting guidance from an experienced attorney on the correct legal action to take.
Of course, an attorney won't help resolve your tax lien and other involuntary liens for free. You have to pay for them once everything is settled. Real estate attorneys charge $150 to $350 per hour.
The Buyer May Try to Renegotiate
When a potential buyer learns that the property is attached to a lien, especially those that are connected to business taxes and federal taxes, they can assume that you are in financial distress and may try to renegotiate for a lower sales price.
Some buyers may only offer the exact amount you owe for the lien. Read your purchase agreement carefully before signing the contract with a buyer.
How to Sell a House with a Property Lien
Discover Existing Liens
Before you close a house sale, a title company will conduct a title search to check for legal issues that can prohibit you from selling the property. This is when liens are usually discovered.
In fact, according to the American Land Title Association, 25% of title searches uncover liens and other issues.
If you don't want property liens to jeopardize a home sale before the closing process, you should discover and settle the liens before you list.
Talk to a county clerk who may have access to these records or consult with a real estate agent or an attorney since they may know how to conduct a property lien search early on.
Evaluate if the Liens are Legitimate
It is possible that the liens on your house, whether tax liens or some other liens, are not legitimate. Thus, it is crucial that you do an evaluation.
If they are indeed fraudulent, you can dispute the outstanding debts so you can be released from the property lien. This should be settled with an attorney's assistance.
Another thing to look into are liens that aren't up-to-date or inaccurate. This is not common but could occur if a lien was missed when you bought the property.
If the previous creditor failed to issue a payoff letter even though the supposed unpaid debt was settled, the lien would still be considered active. You can talk to the former creditor to remove the lien so the sale can proceed.
Deal with the Lien
After identifying the legitimate and active liens, you need to resolve them by creating a payment plan. Here are three ways to deal with the lien.
Payoff the Lien
The best way to settle a lien is to pay for it upfront. This is relatively easy to do if the amount of outstanding debt you owe is not substantial. For instance, the property may be attached to small mechanic's liens or HOA liens.
However, if the amount you owe cannot be covered out of pocket, you may have no choice but to settle it at closing.
Negotiate with the Creditor
Negotiating with the lender who placed a lien on your house is also possible. Depending on what you can agree on, the amount you owe may be reduced, or you'll be given a new payment plan or some hybrid solutions.
For a successful negotiation with creditors or mortgage lenders, seek the help of a real estate attorney.
Transfer the Lien to Another Property
There are cases when a property lien can be transferred to another house or property you own. If the lien transfer is successful, the home you're selling will have a clean title and the payment of the lien can be delayed. Transferring liens often involves a real estate attorney.
Obtain Lien Termination
If you paid for your outstanding debt, the creditor should issue a lien release form to officially terminate the lien recorded in the county records office.
Do not forget to request a lien release so in the future, if the house is listed on the market again, the lien won't be discovered in the property's title search.
List and Market Your Property
After successfully dealing with the lien on your property, you can stage it for sale and list it on the local real estate market. You will avoid title delays and buyers falling through when you pay off the lien before listing.
Alternative: Pay the Lien Using the Sale Proceeds
If the outstanding debt you owe is really large, you may choose to pay for it using the sale of the house if it has enough equity.
As mentioned a while back, you may ask the real estate agent and the buyer to include a clause in the closing statement that a portion of the sales would be used to pay the lien.
This is highly possible; however, some buyers still feel that this is risky especially if the amount owed exceeds the property value. If a buyer does not agree with the clause, they can back out of the sale.
Can You Sell Your Home with a Lien to a Cash Home Buyer or Real Estate Investor?
Yes. You can sell your property with a lien to a cash buyer or real estate investor. In fact, selling as-is to these buyers is highly suggested if you want to skip all the legal and financial hassles of selling on the market.
Since cash buyers and investors pay with cash fast, you'll be able to pay your financial obligation faster. This is a lot less complicated than waiting to get to the closing table with a retail buyer who needs approved for a mortgage.
Final Thoughts: Selling a House with a Lien
Selling a house with a lien can give any owner a massive headache. In most cases, all active property liens should be settled before the title company approves the closing of the sale.
Although a home sale for a house with a lien can feel overwhelming, we offer a simple solution... Selling the house to a cash buyer and using the proceeds to cover the lien can help property owners skip a lot of stress and walk away with some cash.
Here at Sell My House Fast, we make offers on any type of property, even those attached with a lien. What's more, we close fast and cover closing costs, so you only have to subtract what you owe for the lien from the sales proceeds.
If you want to get started selling your house with a lien, fill out our form below or contact us at (844) 207-0788 to know more!