How Real Estate Attorneys Handle Properties with Liens
When a property has a lien, it means a creditor has a legal claim against it as security for a debt. This can complicate any real estate transaction, whether you are buying, selling, or refinancing. Real estate attorneys play a central role in identifying, evaluating, and resolving these encumbrances.
The First Step: Comprehensive Title Search
The process begins with a detailed title search. An attorney reviews public records to uncover all existing liens, including:
- Mortgage liens from lenders.
- Tax liens from local, state, or federal government for unpaid property taxes.
- Mechanic’s liens filed by contractors or subcontractors for unpaid work.
- Judgment liens resulting from lawsuits.
- HOA liens for unpaid homeowners association fees.
The goal is to get a complete picture of what is attached to the title before a transaction proceeds.
Strategies for Resolving Liens
Once a lien is identified, the attorney will determine how to address it. The approach depends on the type of lien, its priority, and the parties’ goals.
1. Paying Off the Lien at Closing
The most common solution is to use proceeds from the sale to pay off the lien. The attorney ensures the funds are properly disbursed to the lienholder, and the lien is released of record. This is standard for mortgage payoffs and many tax liens.
2. Negotiating a Release or Reduction
For liens that are contested or where the amount is disputed, the attorney can negotiate with the lienholder. This may involve:
- Agreeing on a lower payoff amount (a short payoff).
- Securing a partial release if the lien covers multiple properties.
- Arranging a payment plan that satisfies the creditor.
3. Obtaining Title Insurance Waivers or Endorsements
Sometimes a lien cannot be removed before closing. An attorney might work with a title company to obtain a title insurance policy that covers the risk. Alternatively, they may negotiate an escrow holdback, where funds are set aside to pay the lien after closing once it is resolved.
4. Filing a Lawsuit to Remove an Invalid Lien
If a lien is fraudulent, expired, or filed in error, the attorney can file a quiet title action in court. This legal proceeding seeks a judicial order declaring the lien invalid and removing it from the title record.
The Role of Priority: Who Gets Paid First
Attorneys must consider lien priority, which determines the order in which creditors are paid from sale proceeds. Generally:
- First priority: Property tax liens and some HOA liens.
- Second priority: The first mortgage or deed of trust.
- Lower priority: Judgment liens, second mortgages, and mechanic’s liens.
If there is not enough equity to pay all liens, the attorney advises clients on whether a short sale, deed in lieu of foreclosure, or bankruptcy may be appropriate.
Practical Tips for Buyers and Sellers
- Buyers: Always review the preliminary title report provided by your attorney. Ask about any liens shown and how they will be resolved before closing.
- Sellers: If you have outstanding liens, discuss them with your attorney early. A pre-listing title search can prevent surprises at closing.
- Both: Obtain title insurance. An owner’s policy protects against undiscovered liens that appear after the sale.
When to Consult an Attorney
Handling liens without professional guidance can lead to delays, financial losses, or even losing the property. State and local laws vary significantly on lien rights, foreclosure procedures, and recording requirements. Always consult a qualified real estate attorney in your jurisdiction to assess your specific situation and protect your interests.