- The Washington Times - Wednesday, July 20, 2005

A title search is one of the most important activities of the real estate transaction. Without the ability to convey title, a property owner cannot sell his or her home. A buyer would not want to take possession of property without a “clear” title — a title unencumbered by debt or liens.

“Title” is the right to own land. A title or settlement company conducts searches at the courthouse to determine if one owner has an unencumbered — clear — title so the property can be passed over to another owner.

Liens or judgments create a “cloudy title,” and that’s not good — unless the liens are the most common sort, such as a mortgage.

A lien is “a charge or claim against a person’s property, made to enforce the payment of money,” according to my old principles of real estate textbook, “Modern Real Estate Practice,” published by Dearborn Real Estate Education.

These liens are broken down into two major groups: voluntary — you created the lien intentionally, as in taking out a mortgage — and involuntary. An involuntary lien was forced on you, as in the levy of taxes or a creditor’s lien seeking payment.

Beginning investors need to be careful when they go to the courthouse steps to bid on a property. If they “win” the property, it might mean they just purchased a bunch of liens that are attached to the property and convey with it.

Keep in mind that if someone has allowed a house to go to foreclosure, financial problems are apparent. That means liens could be placed on the property from vendors seeking payment.

Mortgage companies place liens on the property for the mortgage amount.

Other liens could be placed on the property for taxes or fees outstanding to contractors. This type is called a mechanic’s lien. Homeowner association dues can be assessed through a lien, too. You even might find liens for utility companies and local creditors.

When a house goes to foreclosure, the lien holders get in line for payment. First in line is the government, seeking taxes. This lien is the first priority, even though the general rule is “first-come, first-served.” All other lien holders had better hope they placed a lien on the property early.

For example: Mr. Smythe is ordered to go to foreclosure on his home and is able to receive $275,000. He has a tax lien for $5,000 the current year, a first-trust mortgage from 1998 for $125,000, a judgment lien from a creditor for $100,000 from 2003, and a mechanic’s lien for work done by a contractor on his deck for $20,000 from 2002.

The order of payoff likely would be: taxes, $5,000; first trust, $125,000; mechanic’s lien, $20,000; judgment lien from creditor, $100,000; Mr. Smythe, $25,000.

The seller receives the balance of the proceeds — assuming the creditors have not sued him for the cost of the foreclosure and fees.

If Mr. Smythe goes to foreclosure in a down market and receives just $200,000, the proceeds list may look like this: taxes, $5,000; first trust, $125,000; mechanic’s lien: $20,000; second trust, $50,000; Mr. Smythe, $0.

In many foreclosure cases, the mortgage company will pay the taxes so it can be first in line to regain its investment. A creditor might move ahead in the line through a “subordination agreement” with another lien holder to change the priority, but very few companies are willing to subordinate recovering their own expenses to other creditors.

If you find yourself in a must-sell situation, it’s best to let your agent know immediately that you might have liens on your property. She’ll find out about them during the title search.

Those facing foreclosure may have creditors’ judgment liens on their house and not even know it. The only way to find out about them is to visit the courthouse and look at your records.

Always consult an attorney to protect your interests if you have any questions regarding a lien on your property.

M. Anthony Carr is the author of “Real Estate Investing Made Simple.” Post questions or comments at his Web log (https://commonsenserealestate.blogspot.com).

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