EquityBuild Real Estate Investing NewsA distressed homeowner, one experiencing problems making their mortgage payments on time, will likely have other credit accounts currently in or near default. At a minimum, if there are any outstanding credit card accounts, the payments on those are late as well if not already in collection.

Yet when late mortgage payments begin to accrue, and a foreclosure filing is public record, it’s likely the mortgage company isn’t the only one with a claim on the property.

When a mortgage is first issued, a lien is placed upon the property by the lender. The lien will stay on the home until the mortgage is retired, usually as a result of refinancing the mortgage or selling the property outright. But there are others that can legally file a lien on a home besides a mortgage company and these liens must be satisfied before the property can change hands. What are they?

Mechanic’s Liens. When a contractor such as a carpenter or roofer performs any work on a home, they almost always file a mechanic’s lien in the amount of the work to be performed. The lien will remain on the property while the work is being done and will only be released once the contractor has been paid. If the homeowner never pays the contractor, the lien will remain. When the property is sold, the contractor will receive their delinquent funds from the sale proceeds.

Tax Liens. Delinquent property taxes and income taxes are eligible to be filed against the property. Even if the homeowner has made a payment plan with the IRS, the tax lien will remain until the liability is paid in full. Tax liens must also be cleared before a property can be transferred from buyer to seller.

Support Payments. Depending upon the location of the property, delinquent child support and alimony can be attached to the home, created by a court order with a lien filed against the home.

Judgments. Where allowed, certain financial judgments awarded by a court order can also appear as a lien against the property.

Now let’s look at how existing liens can affect your potential equity in a property. Say that you make an offer on a home for $200,000. You review a copy of the preliminary title report and review any existing liens. You discover:

Mortgage         $150,000
Mechanic Lien $  30,000
Property Tax    $   3,000
Income Tax      $   3,000
Total Liens       $186,000

Property LiensNot counting any closing costs associated with buying this property, without the additional liens you would make $50,000. When including the outstanding liens, your gross profit is reduced by $36,000. See the impact?

What happens when there doesn’t appear to be enough equity in a property to satisfy all the outstanding liens? Some negotiation is in order. Outstanding creditors can agree to a lien release if the current owner sets up a repayment plan or negotiates a reduced payoff. Property taxes and income taxes may also be open to an approved repayment plan. In any case, once a lien is released, the release will be filed with the county, and the sale can proceed.

You won’t be able to discover any liens on any property until you review a copy of a title report or visit the county recorder’s office and do your own homework on a potential purchase. Just remember when considering buying a foreclosure, the mortgage company may not be the only one with a claim.

by, Sydny Cohen: EquityBuild News Editor