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If you want to dig into the realities of land development, you’ve come to the right place.

What is a Real Estate Lien?

What is a Real Estate Lien?

Understanding Real Estate Liens

A lien is the legal right a creditor has to pursue a claim against a defaulting debtor. In the world of real estate, when an action of value is performed on real estate there is a resulting claim against it. The real estate involved in the transaction is security for the debt. Be aware that different states have different lien laws, so I make sure to know and follow them.

Effect of liens on property value:

Typically, the value of a property is reduced by liens as demonstrated in this simple equation:

  • Value of Property - Liens = Equity

Why should I be on top of this?

Before looking at the various types of liens, why should a person care? A key reason is the depth of trouble with creditors that someone can get into before they realize it. Obviously, even one unintentional lien is one too many, but more is worse.

Example:

Payment deficiencies from a contractor can take time to surface. If I am a trusting property owner, assuming my contractor is paying suppliers, I could be completely fooled.

This kind of problem can surface very quietly and then explode suddenly. I tend to compare an unnoticed but emerging problem with liens like microwaving popcorn. It takes about 2 minutes to pop a bag. The first minute nothing is really happening, the second minute all hell is popping loose.

If I am having a home built and the General Contractor does not pay the suppliers of materials and services, liens can be placed on my property from multiple sources for amounts into the tens of thousands. Worse, if the contractor goes bankrupt I can be left completely holding the bag.

So, before we look at how to prevent this let’s look at some different types of liens.

Types of liens:

Voluntary Lien:

One of the most common examples of a voluntary lien is a mortgage. Here the borrower, (mortgagor), voluntarily pledges, (hypothecates), the property as security to the lender, (mortgagee), for a loan. Thus, in exchange for the money, the borrower pledges the property and its’ associated value.  If the borrower defaults on the loan, the property can eventually be sold through foreclosure as the final remedy.

Involuntary Liens:

A common example of this type of lien would be property tax. Through the county taxation statute a direct lien is assessed against a property as a matter of law. Through on-time tax payments the property remains current with the obligation, but the lien is perpetual in nature since the tax continues to accrue on the property and is an obligation for the duration of ownership. Another example of an involuntary lien would be a court judgement ruling.

Specific liens:

Can be voluntary or involuntary. A specific lien, like the name implies, is a lien against a specific parcel of real property. A personal example was a time when I paid a contractor for roofing material, but he failed to pay the supplier. I subsequently got a lien on my parcel of property. The lien was quickly released because the contractor and I had a “little meeting” on the subject.

General liens:

General liens are against all assets that can be captured by law, to include any real property. Here we find things like unpaid federal or state taxes, unpaid inheritance tax, or the outstanding debts of a deceased person.

The lien process:

Again, each state has different lien laws and the procedures must be lawfully understood and followed. A supplier can lose the right to lien a property if the procedures and time requirements are not fully adhered to.

Notice of Intent to Lien:

When receiving one by Certified Mail don’t panic, the supplier may just be securing his/her lien rights.

In my state a Notice of Intent to Lien must be provided to the property owner, or the right to lien is not enforceable. This must be done within a statutory timeframe after materials and/or services are supplied for a property.

If I fail to pay a plumbing contractor for example, by having lawfully provided me with a Notice of Intent to Lien, he has provided the required notice and secured his lien rights. If I continue to stiff him, he can act on those rights against my property by enforcing the lien and taking collection actions.

How to prevent lien problems:

I paid cash for a house I was building a while back. Each month I would pay the General Contractor, who in turn would pay the material suppliers and sub-contractors.

I would routinely get various Notice of Intent to Lien letters, but it was no big deal since this builder paid each creditor on time. My builder provided me with lien releases or partial lien releases from the suppliers each month and all went well.

Lien Releases:

Lien releases are key to make sure the contractor is not just taking the money from me, then not paying creditors on my behalf. A lien release certifies from the creditor that they have been paid either partially, or in full, for the items of value provided for my property.

Partial Lien Releases:

These are lien releases for partial payments, tied to an agreed upon schedule. As installment payments are made, the creditor issues a partial lien release for that portion of the debt that has been paid against the outstanding balance.

Full Lien Release:

The creditor acknowledges that payment in full has been made and releases all lien interest for the given transaction.

Avoiding confusion:

I am relatively good at basic book keeping but I can say that it is a major pain to track all the incoming invoices, due dates, notice of liens and lien releases. This gets really involved when a project is going full-tilt construction. No matter the pain, I stay dedicated to this process to avoid default on debt obligations for my property.

Another kind of lien release - Oh’ Happy Day.

You have mortgage and you just paid it in full. Congratulations! This is where in the old days Grandma & Grandpa held a party to “Burn The Mortgage”. There was a big party and everyone had fun and got loopy. Then they put a match to the mortgage documents for all to see.

Not today. These days a mortgagee (the lender) is required to execute a satisfaction of mortgage document and deliver it to the mortgagor (borrower). This surrenders the lien interest the lender has in the subject real estate. A mortgage is almost always secured by a Deed of Trust on the property, so the lender will deliver a Deed of Reconveyance to the borrower, which is then recorded at the county.

It’s never done until it’s done – so make sure the reconveyance on a fully paid real estate loan is delivered and recorded.

Liens are serious business:

I stay on top of voluntary liens to make sure they are paid and ultimately released. I avoid involuntary liens and unintentional default by being diligent and keeping track of my contractor’s payments to subs and suppliers. In every case I track the money I pay, all the way from my contractors or suppliers to the end creditor. This keeps me current and out of unintentional trouble.

Real Estate Experts

Real Estate Experts

Recording and Public Records

Recording and Public Records