Liens are notices attached to your property that give the bearer a security interest in said property until the debt owed is discharged. When a lien is placed on your property, you are limited in terms of what you can do with it.
You might, for example, not be able to do things like take out a second mortgage, sell, or finance your property until the lien is paid off.
While liens are a limiting tool used by creditors to secure their debts, some types of liens such as tax liens, can also be a great investment opportunity when it comes to income stability and the return of above market interest rates.
A lot of care needs to be exercised when evaluating liens as an investment opportunity and for this reason, only the most knowledgeable people in matters of real estate undertake property tax lien investing.
Types of liens
This type of lien is created when you agree to give a lender an interest in your property to serve as security for a loan. Common examples of voluntary liens involve mortgage and car loan lenders.
This type of lien is involuntarily granted to your creditor to secure a debt you owe. This type of lien mostly comes into play after you have failed to pay an unsecured obligation. Non-consensual liens are primarily divided into statutory and judicial liens.
This type of lien is as a result of court judgment. Sometimes, state and federal laws provide for judicial liens. If a judicial review is subject to such laws, property attached and the procedures that must be followed are laid down by law. There different types of judicial liens.
A creditor is given the right to place a lien on your property after it successfully wins a judgment in a court of law.
Garnishment or attachment liens
This type of lien enforces the attachment of your property to anyone who is served with a garnishment or attachment order. These liens are commonly applied to seize bank accounts or wages.
Child support liens
This type of lien is placed on your property if you owe a great deal in child support.
These liens are created by federal or state laws. The property that is affected depends on what the Lien attaches to. Examples of statutory liens are discussed below.
Property tax liens
This lien is placed by the government on unpaid taxes. Property tax liens take priority over all other mortgages or liens placed on a property.
Internal Revenue Service liens
This lien is placed on your property if, after receiving notices from the Internal Revenue Service (IRS), you fail to pay back taxes. The IRS usually utilizes this lien if you are unemployed, self-employed, or sporadically unemployed and the IRS would have trouble attaching your income.
If you fail to pay your contractor for services rendered or materials delivered, he may record a lien on your property known as a mechanic’s lien. In most states the contractor is required to record a lien within six months of being unpaid. The contractor must then sue to enforce the lien within a year.
Family law real property lien
In a matrimonial action suit brought forth in the State of California a spouse may file a lien against his or her interest in commonly held real estate to secure payment of attorney fees accrued in the action. The lien affects only the filing spouses’ interest in the property.
This is of course only one example, check your individual state and municipal laws or a local attorney for guidance.
Condominium association liens
These liens together, with homeowners’ association liens are generally taken to be statutory liens but vary by state. One should confirm with the local attorney for more information.
These liens are provided to landlords to enable the recovery of unpaid rent. These liens generally apply to commercial leases and give the landlord an interest over business inventory and equipment. Strict requirements must be met before the landlord exercises this lien.
How does a lien effect your property?
To undertake any property transaction, including sale and financing, the property needs to have a clear title. A lien charged to your home, vehicle, or any other property makes the title unclear. To clear up the title you must pay the lien. Creditors know that having a lien on a property is the surest way to have debtors pay up on debts.
How creditors collect on liens
Creditors who have placed a lien on a property have a right to have the property sold or demand payment of the lien. They can usually exercise this right by way of a sale or foreclosure. Only in rare circumstances do creditors demand the sale or foreclosure of property to pay off a lien, as the local tax authorities normally enforce such action.
If a property is mortgaged, the creditor, on enforcing foreclosure, has to keep up with mortgage repayment. Creditors prefer to wait until the property is sold. In most instances, buyers would want a clean title on the property, thus proceeds from the sale would first be used to settle the lien.
What to do if you get a tax lien on your property
There are various actions that you can take if a lien is placed on your property. The best will based largely on how much you owe and the specifics of local laws. In general, an IRS tax lien is preferable to a state or municipal lien.
The IRS is known for chasing after those who owe a lot of back taxes. This can be daunting enough, but if you have multiple liens on your property, the maze of local, state, and federal law can be extremely confusing.
Your primary concern should be on paying the smaller government debts first. It is fairly easy to lose your property to small tax demands in an era where state and local Governments are faced with increasing budget shortfalls.
In most instances, if you have a federal tax lien you have much more time to work things out and the likelihood of keeping your property goes up considerably unless you owe a significant amount of money.
Do note, however, that having a lien is a financial inconvenience since your credit score will go down considerably, further weakening your ability to improve your financial condition.
When the federal government is serious about the tax lien, they will issue a tax levy, which is a legal claim made against the property and grants the government the authority to seize the proper in order satisfy the debt.
You could also lose wages, vehicles and other personal property as a means of satisfying your debt.
Try and establish contact with the number provided on the lien paperwork. Contrary to popular opinion, you might be able to work out a compromise and get a better deal than one might suppose.
In some instances, the IRS will let other creditors take their debts before the IRS as they may also make a compromise which allows the taxpayer to pay off the debt in small instalments.
Can a creditor put a lien on my house?
As a general rule, if the creditor wins a court judgment against you, he is handed several tools to try and collect the judgment. These can include putting a lien on your house.
When your financial interest in the house is low, the interest may be protected, preventing a creditor from placing a lien on the house.
Is there a lien against a property I own? How to find out
- Investigation whether or not liens are attached to the property is very simply. One way is simply to sort through the court records and try to find out for yourself. An alternative option would be to ask a property agent to find out on your behalf.
- The second alternative will cost you a little money but you might save a great deal of time. If you have a mortgage on your home, simply call the bank. They should be able to inform you about any encumbrances they have, apart from the loan you owe them.
Investing in property tax liens
- Occasionally, people will place a lien on a property illegally. The most popular such scam is run by contractors who are not supposed to. Your main contractor may fail to pay subcontractors under his care who then end up placing a lien on your property.
- Most local regulation allows you to sidestep this scam by demanding a lien waiver from both contractor and sub-contractor alike at disengagement. The document is a declaration that they have received their payment and will not make any additional claim on your home.
How you can invest in property tax liens
- For the investment savvy, property tax liens provide a welcome relief to the volatile stock exchanges and historically low-interest rates offered by financial markets. Property tax liens offer an avenue of reasonable and stable returns.
- To the novice investor, property tax lien investing should be approached with care as they also carry substantial risk. Anyone venturing into this investment class of assets should strive to understand the rules and potential pitfalls that come with this market.
Making profit from the lien
- Tax lien certificates are created by the local municipality. These certificates show the amount of lien that is owed on a property plus any interest and penalties that have accrued up to the date of issue. The certificates are auctioned off to the highest bidder.
- Tax lien certificates can be purchased either low or high, running into the thousands of dollars.
- Investors who are willing to accept a low-interest rate on a lien certificate or those who pay a high premium on the amount will be awarded the lien.
- If you are interested in holding onto a lien you need to take into account, the following:
- Whether the property is residential or commercial
- Whether the land is undeveloped or contains property improvements
- Interested people can contact their local municipal office to find out details about lien auctions. They will find rules defining such issues as pre-registration requirements, accepted methods of payment and other pertinent issues.
- Investors who purchase the lien certificate are required to immediately pay the lien in full, then notify the property owner that they are the new holders of the lien. The property owner becomes fully indebted to the new lien holder. He must pay the entire amount of the lien, plus any interest.
- If the investor paid a premium on the lien, this may be added to the amount that is repaid in some instances. If the property owner cannot pay the lien by the deadline, then the investor has the authority to foreclose on the property just as the municipal would have had done.