In order to make money in real estate one needs to be able to buy low and sell high.
In order to make this happen one needs to find a motivated seller, this seller has to be motivated and have clear title to the property.
Title is the right to own land and the evidence of ownership of that land.
There is no such thing as perfect title to land, but we need to make sure title is marketable and insurable in order for a deal to go through.
Title to land does not require the absence of defects, but suggests that educated buyers/investors would accept it and go through with the deal.
It’s important that investors know the importance of marketable title as well as the encumbrances that can impact the deal.
An encumbrance is anything that can affect the title to real estate.
In basic terms it is the right or interest held by a third party to the property.
An encumbrance may affect the value or obstruct the use of the property but it does not necessarily prevent a transfer of title.
Tax liens and deed restrictions are common encumbrances that do not prevent the transfer of title.
A lien is a charge against the property that provides security for a debt or an obligation of the property owner.
A lien does not constitute ownership, rather it is a type of encumbrance.
Real estate taxes, mortgages and truest deeds, judgements and mechanics’ liens all represent possible liens against an owner’s real estate.
Investors need to make sure to discuss clear title with sellers and if there any possible liens against the property.
Investors need to make sure sellers understand that if any encumbrances exist that these will be taken out of the proceeds before they collect their monies.
Any educated buyer will require a title search which should uncover any encumbrances or defects in the title.
This title search is done to protect the buyer and their investment, as an investor you should due your due diligence and understand the types of encumbrances out there, what they mean and how they can impact the deal.
Liens fall into several categories, based on how they are created.
A voluntary lien is contractual or consensual and is created by the owner’s actions, a good example of this would be taking out a mortgage on a piece of property.
An involuntary lien is different in that it is created by the law, some good examples of these would real estate property taxes and mechanic liens.
In general, a mortgage or deed of trust lien is voluntary and specific to real estate given to a lender by a borrower as security for a real estate loan.
It becomes a lien on real property when the lender records the mortgage or deed of trust in the office of the register or deeds in the county where the property is located.
Mortgage and deed of trust liens are the most common type of lien or encumbrance.
If a property owner/seller fails to pay the taxes levied by a city or county on the property, the unpaid tax becomes an involuntary lien on that specific property.
The lien attaches to the property on the date the property is listed and is a superior lien, which means it takes priority over all other liens.
In addition to the real estate taxes, special assessment taxes may be levied against specific real property.
The purpose of these taxes is to pay for the improvement that has benefited the taxed property, such as street paving or installation of a sewer system.
There are many other types of encumbrances or liens that can impact a property.
A mechanic lien gives security to those folks who perform labor or furnish material in the improvement of a property.
A mechanic lien is available to contractors, architects, equipment lessors, surveyors and labourers amongst others.
This lien is filed when the owner of the property has failed to pay for the work or when a contractor has been paid but has failed to pay his subcontractors or suppliers.
It is important to note that to be entitled to this lien, the person who did this work must have had a contract with the owner or an owner’s authorized representative.
This lien must be filed within 120 days after last supplying the labor or materials.
The liens mentioned above are all specific liens, meaning they only impact the specific property.
General liens are a bit different in that they affect all the property of the owner, meaning both real and personal.
Examples of general liens are judgements, personal property tax liens as well as state and federal tax liens.
A judgement is a decree issued by a court, this type of lien is usually good for 10 plus years.
Personal property tax liens like real property tax liens has priority over other type of liens.
Unpaid state inheritance and income taxes are general liens against the individual taxpayer, these liens are also good for 10 years or more.
Federal tax liens are issued when an individual fails to pay any portion of their federal IRS taxes, such as income and withholding taxes.
The priority of this type of lien is based on the date it was recorded and does not supersede previously recorded liens.
Understand, the purchaser/buyer/investor will buy the property subject to any liens because liens run with the land, in other words they will bind with successive owners if steps are not taken to clear the liens.
Remember, liens attach to the property, not the property owner.
So, although a purchaser who buys real estate under a delinquent lien is not responsible for payment of the debt secured by the lien, the purchaser does face a possible loss of the property if creditors take court action to enforce payment of those liens.
It is imperative that as investor that you understand the importance of obtaining a title that is marketable and insurable.
You should always require a title search, even if your seller guarantees the property is owned free and clear.
You need to be certain that you are protected and you know exactly what you are buying and what responsibilities you may have.
I have known one too many investors that avoid the title search to save themselves a few bucks only to later find out they are required to pay over $30,000 in mechanic liens and back taxes.
Remember most of these encumbrances run with the property and not necessarily with the owner.
Do your due diligence when buying a property or selling a property for a seller.
It will help you to be able to explain what exactly the different type of liens mean and what/why the seller is responsible for paying them.
Please note, if buyer buys a property without a title search and later finds liens associated with the property, the buyer and not the seller will be responsible for paying those fees.
Of course there are extenuating circumstances, but don’t take the risk and make sure to do your due diligence and pay for the title search as the peace of mind and overall savings will be well worth it.