In other words: Don't give up hope! Here's how property liens affect home sales, and what you can do about it.
What is a property lien, anyway?
A property lien, in case you're foggy on the concept, is a public record filed against your property for unpaid debt. Liens can be filed by an assortment of people and parties for various reasons: the government (for unpaid taxes), contractors (on renovations they weren't compensated for), ex-spouses (for child support payments), credit card companies, and more.
Sometimes, home buyers may not even know there are liens on their property until they’re uncovered during a title search as the deal moves toward the closing table. Or homeowners may already be aware of the lien, but lack the funds to pay it off.
In either case, all liens must be settled before a home sale can happen.
“If you attempt to put a house up for sale with liens, you are going to run into delays,“ warns Nick Woodward, a real estate agent with Keller Williams in Connecticut.
Do liens mean a property sale can't go through?
In some cases, liens can mean delays that are only hiccups. The sale can still happen, but the lien is going to eat into whatever profits the seller may have hoped to bring in.
Let's say, for example, you’ve agreed to sell your house for $200,000 and still owe $100,000 on your mortgage. Normally, at the closing table you'd pay off your mortgage and be left with $100,000 in profit. However, if a $15,000 lien is also found on your property, that will have to be paid off first, so your profits will be only $85,000 (minus any other closing costs, of course).
Issues can arise, however, if you don’t have enough equity in your home to cover the liens.
“If you have enough equity to cover the lien, you should be all set," says Woodward. "However, if you have low equity, the profits from your house sale may not be able to take care of the lien."
For instance, if you're selling your house for $200,000, yet still owe $190,000 on your loan, you have only $10,000 in home equity. If a lien is found on your property for $15,000, your home sale won't even cover the lien, which puts this sale in jeopardy.
The first step to getting a lien removed from a property's title is, of course, to pay the debt. But if you don't have that option, all is not lost. Here are two options:
- Negotiate with the party who issued the lien. Many will remove liens if you agree to pay just a portion of the amount owed, or set up a payment plan to pay it off gradually. It can't hurt to ask.
- Negotiate with your buyer. You could try to persuade the buyer to take on the lien, although the chances of that happening are slim.
“Ninety-nine percent of the time, the buyer will not want to take over a lien," says Mike Higgins, a real estate agent in De Pere, WI. Or, even if buyers are willing to, they may have trouble getting a loan to purchase a property with a lien on it, as most lenders won’t finance them.
Yet there are some cases where liens are often transferred to buyers. For example, homes purchased in a foreclosure or at an auction may come with liens attached that become the buyer’s responsibility. While those properties may seem like a bargain upfront, a hefty lien can tip the scales.
So, should home buyers run if there’s a lien on a property they're interested in buying? Not necessarily. says Higgins.
"Always rely on your professional that you are working with—the real estate agent or title company—to get to the bottom of it, and first see if the seller will take care of the lien,” he says.
However, he urges buyers to proceed with caution. “Make sure you know 100% what it all entails before signing on the dotted line," he says.