What Is a Property Lien?

By Moolah List

What Is a Property Lien?

By Moolah List

Most real estate investors have a general idea of what a property lien is.

They are aware of the fact that a lien clouds the title to a property, making it difficult, if not impossible, to sell or refinance. 

What follows is a description of the various kinds of liens, how they are created, how they are enforced and how they are removed.

Types of Property Liens

When discussing property liens it is helpful to note that liens can be categorized as general or specific and voluntary or involuntary.

Specific Lien

A specific lien attaches to a specific asset owned by a debtor.

For example, a lien on a home is a specific lien on a particular asset.

Should the borrower not make the required payments, the remedy available to the creditor cannot exceed the value of the specific asset.

General Lien

If a lien attaches to every asset in the borrowers possession it is classified as a general lien.

With a general lien, a borrower's bank account, cars, house and personal property are affected.

For example, a general lien can be the result of an IRS tax lien from unpaid income taxes owed to the federal government. 

Voluntary Lien

The most common voluntary lien is a mortgage on a property.

If a property owner voluntarily agrees to have a lien attached to his or her property, that lien is classified as voluntary.

The owner of the property voluntarily grants the lender a security interest in the property. 

They sign a deed of trust or a mortgage to create security for the loan.

The lender records the mortgage at the county recorder's office and by doing so, places a lien on the property.

The lien gives the lender the legal right to foreclose on the property if the borrower does not perform according to the terms of the loan.

Involuntary Lien

Liens placed on a property without the owner's consent are classified as involuntary.

Unlike voluntary liens, involuntary liens are placed on an individual's property without their permission.

Involuntary liens fall into one of two categories: 

  • Those that are attached to an individual's property by rule of law 
  • Those that are attached as the result of a court judgement

Rule of Law Liens

With regard to liens that attach to property as a result of the rule of law, they include; 

  • Liens by the Internal Revenue Service
  • Liens placed by various state taxing authorities 
  • Property tax liens

If an individual, having been given sufficient written notice fails to pay income taxes to the IRS, the agency can place a lien on the individual's property.

The IRS resorts to such a measure when the delinquent taxpayer is unemployed or self-employed and the garnishing of their income is difficult.

If the amount owed is substantial, the IRS may force a sale of the property.

Otherwise, it will wait until the taxpayer sells or refinance the property, in which case it will automatically be paid.

State government taxing authorities have the power to act in a manner similar to the IRS.

Property Tax Lien

Property tax liens occur when the property owner fails to pay their property taxes.

After following the procedures mandated by individual state laws, the state can force the sale of a property in order to satisfy a delinquent tax bill.

Subsequent to the sale, the owner may be able to claim their property provided the taxes and any costs are paid.

Also, if there is a mortgage on the property, in most cases the lender will satisfy the tax bill to protect the mortgage.

The amount paid will then be added to the mortgage balance.

Besides property taxes, homeowners belonging to a homeowners association are responsible for dues.

Failure to pay dues can result in a lien placed on the property according to the covenants, codes and restrictions of the association.

Court Judgement Liens

Liens that attach to property as the result of a lawsuit include;

  • Child support liens
  • Spousal support liens
  • Mechanics liens
  • Liens resulting from unpaid credit card debt
  • Medical bills 
  • Personal loans

Failure to pay child support and or spousal support can lead to a lawsuit against the obligated individual.

If the party filing the lawsuit prevails and is awarded a monetary judgement, they can place a lien on the property of the losing party.

The lien will remain attached to the property until it is sold, refinanced or until the prevailing party forces a lien sale.

In the state of California, in an action for alimony, a spouse can recover attorney’s fees by placing a lien on the community property portion of the real estate owned jointly by the both parties.

Whenever someone fails to pay a personal loan, credit card debt or large medical bills, they face possible legal action from the unsecured creditors.

In order to place a lien on an individual property, the unsecured creditor must first file a lawsuit.

Upon prevailing in court and receiving a monetary judgment, the creditor can place a judgement or lien on the property owned by the debtor.

In some states creditors are allowed to place a lien on someone's personal property as well as their real estate.

Mechanic’s Lien

Any discussion of liens must include one which most people are familiar with: the mechanic’s lien.

If an individual hires someone to perform major work on their home, such as installing a swimming pool or building an addition and they are not compensated for their work, they can file a mechanic’s lien on the property. 

Generally speaking, in the majority of states, the contractor must record the lien within one to six months. 

Once the lien has been recorded, depending on state law, the contractor has anywhere from one month to six years to file a lawsuit against the property owner.

If the contractor prevails in court they may be in position to force a sale of the property.

Every state has established expiration dates for mechanic’s liens.

If the contractor fails to file a lawsuit within the proper time frame, the mechanic's lien expires.

Any claim not enforced prior to the deadline established by the state is no longer valid.

Even if an individual has paid their general contractor in full there is the possibility that the general contractor has not paid one more more subcontractors.

The property owner may not even be aware of these subcontractors.  

Even though the property owner might not be at fault, those subcontractors are entitled to file mechanic’s liens against the property. 

Lien Waivers 

To alleviate such problems with contractors and subcontractors it is advisable to utilize what are known as lien waivers.

Whenever a contractor or a subcontractor receives payment for services rendered they should execute a lien waiver in the sum of the payment.

In other words, in exchange for payment the contractor or subcontractor waives an equal amount of lien rights.

Lien waivers represent evidence of payment and provide satisfaction that in the future a lien won’t be claimed for amounts previously paid.

Lien Priority

Often times, if a property has a lien attached to it, there will be other liens as well.

In what order liens are paid off involves a concept known as lien priority

Lien priority determines the order in which lien holders are paid.

A lien is paid off before another lien if it has priority.

Generally speaking, the order in which liens are recorded determines their priority.

This practice adheres to the rule of law referred to as "first in time, first in line."

However, there are exceptions to the rule.  

Subject to individual state laws, with regard to property, some liens have priority over previously recorded liens.

As a general rule, priority of payment depends on two factors: 

  • The type of lien 
  • When the lien was filed

In most cases, first priority will be given to tax liens followed by mortgage liens while other liens will be paid in the order of their ranking.

In the event there are a number of mechanic’s liens, priority is established by one of two ways: equal priority or first to file.

The equal priority rule is followed by a number of states.

It provides for "relating back" to when a project was started.

Claimants share the available proceeds based on each ones percentage of the total legal claims.

Property owners attempting to remove liens should consider the following:

  • In order to dispose of a mortgage lien or a tax lien there is no magic remedy other than to pay what is due.
  • When that happens, the lien holder must remove the lien within a specified time period or face a penalty.
  • A lien release form or a lien cancellation form must be filed by the lien holder with the recorders office where the lien was originally filed.

With regard to the removal of the mechanics liens, the property owner has a choice of remedies.

One choice is simply to pay the amount claimed.

However, suppose the property owner doubts the validity of the lien.

In that case, the county recorder will not provide assistance; the recorder does not judge whether or not a lien is valid.

If the claimant fails to commence the enforcement process within the allowable time frame, the lien loses its validity.

Notice of Contest

Some states allow the property owner to file a Notice of Contest.

Once the lien holder receives the Notice of Contest they must enforce their claim within 60 days.

If the claim lacks validity, the lien holder is unlikely to attempt to enforce it.

Another option available to the property owner is to gather evidence and wait for the claimant to file an enforcement lawsuit.

Once in court, the property owner's evidence may result in a rejection of the claim and they may be reimbursed his legal fees and court costs.

Bonding Off a Lien

Lastly, a property owner can discharge a lien by doing what is known as "bonding off a lien."

Bonding off a lien allows a property owner to remove a lien by replacing it with a surety bond.

The surety bond becomes the collateral for the debt, in effect, replacing the property.

The claim still exists.

However the property owner is free to sell or refinance and attend to the lien separately.

In this guide we expore the following:

  1. Types of Property Liens
  2. Specific Lien
  3. General Lien
  4. Voluntary Lien
  5. Involuntary Lien
  6. Rule of Law Liens
  7. Property Tax Lien
  8. Court Judgement Liens
  9. Mechanic’s Lien
  10. Lien Waivers
  11. Lien Priority
  12. Notice of Contest
  13. Bonding Off a Lien

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