A lien is a financial claim that a person or business has against real property. Liens are typically placed on real property, such as a home or commercial building, but can also be placed on other forms of real property, such as cars, investments, and business equipment.
How do liens work?
The word “lien” comes from the Latin riggerThis means “to bind.” In other words, a lien binds the debtor to the property.
Similar to an anchor on a boat, a lien is an economic anchor that holds property until it is released. There are restrictions on what you can do with real estate, including selling it.
Related: Searching for Liens on Real Estate: How to Search for Liens on Real Estate
In fact, a lien gives the creditor legal rights. This includes things like foreclosing on real property and selling it to satisfy a lien.
To obtain a lien, you must file a complaint with the court in the county where the property is located. Different regions and states have different laws and procedures regarding filing liens.
different types of liens
Liens can be either consensual or non-consensual (also called statutory).
A consent lien (also known as a discretionary lien) is one you agree to, such as when your home or car serves as collateral for a mortgage or auto loan. For example, a mortgage lien remains on your home until the debt is paid off.
A non-consensual or involuntary lien, on the other hand, is placed on real property for an unpaid debt. There are several common types of non-consensus liens.
Mechanic’s liens are typically collected by contractors or subcontractors for unpaid work on a home or property. To place a mechanic’s lien on a property, a contractor or subcontractor must go to court and obtain a judgment.
A tax lien is a statutory lien for unpaid taxes imposed by either a federal, state, or local taxing authority. A common example is a real estate tax lien. These liens must be paid before the mortgage.
Internal Revenue Service (IRS) tax liens are attached to all current and future assets, including personal property, automobiles, and investments. Federal tax liens in the United States are hardly surprising. The IRS will send you a tax notice and request payment before placing a lien.
If someone sues for unpaid money and wins, a judge can grant a lien. Filing a lien judgment against the property as part of the judgment may be the only way to recover the money owed.
Judgment liens are typically granted in small claims court.
An attorney’s lien guarantees payment of legal costs. This type of lien is often used in personal injury cases to ensure that the attorney’s necessary legal fees are paid from the client’s award.
These types of liens are the most common, but there are others that can have an impact.
Liens and debt burdens
Debts, broadly defined, are claims by third parties against your property.
A lien on real property is a debt, but not all debts are liens. The only financial debts are liens. These are also the most common disorders.
Other restrictions include deed restrictions, easements, and encroachments. These may impose restrictions on how the assets can be used or restrict the transfer of the assets.
- Deed restrictions restrict the use of real estate, such as restricting changes to historic elements of the home.
- An easement gives a third party the legal right to use land. For example, utility companies typically have easements to evaluate equipment and construct power lines.
- Encroachment is when another property owner’s building encroaches on your property.
Removal of lien from property
The easiest way to get a lien released is to pay off the debt. Alternatively, the lienholder and property owner may agree to a repayment plan, conditional on the lienholder releasing the lien.
Liens are secured loans, but some can be discharged in bankruptcy.
You can also satisfy a lien by selling or foreclosing the property. The proceeds of the sale will be used to pay the debtor. However, if the Lean is not done as agreed, this can damage the property owner’s credit rating.
If the owner sells the property, the lien must be paid off. For example, a car that is financed will have a lien attached to the title. Before an individual can sell or trade in a car, they must first pay the remaining debt to the lender.
Tax lien investment as a real estate strategy
Investing in tax liens is an alternative real estate strategy that provides high returns. However, it is an area that requires specialized knowledge and a proactive approach to minimizing risk.
Related: Tax Lien Investing: How to Find Tax Delinquent Properties Near You
Here are the steps to get started:
1. Understand what a tax lien is
Before we get into it, it is important to understand what a lien is. A tax lien is a legal claim by a government authority against real property if the property owner fails to pay taxes. A lien secures the government’s claim to all proceeds from the sale of the property and, in some cases, may allow the investor to take possession of the property itself.
2. Research the rules and regulations
Tax lien laws vary by state, so be sure to familiarize yourself with the rules, interest rates, and redemption periods that apply to your area of interest. Some jurisdictions have online resources where you can also consult with legal professionals experienced in tax lien investing.
3. Evaluate risk and return
While the benefits from tax liens may be attractive, they are not without risks. Evaluate property condition, neighborhood, and market trends. A detailed due diligence process will help you assess the potential returns against the risks involved.
4. Participate in a tax lien auction
Tax liens are often sold through public auction. You can participate in these in person or online. Be sure to set a budget in advance and stick to it to avoid overbidding.
5. Monitor your investments
Once you have a tax lien certificate, it is important to monitor your investment. Record the redemption period. During this period, homeowners can repay unpaid taxes with interest and get their property back. If a period of time passes without payment, you may have the option to foreclose on the property.
6. Exit strategy
Have a clear exit strategy. Whether you collect the lien plus interest, acquire the property through foreclosure, or sell the lien to another investor, knowing your end goal helps you manage your investments effectively. Helpful.
7. Rinse and repeat
After you make one successful tax lien investment, evaluate what you learned and apply it to future investments. This is an area where experience and expertise can significantly increase your profits.
Generally, a lien means that someone owes you money. Liens can be placed on things like your home, car, and other valuables. Knowing how liens work can help you in two ways.
First, you can protect yourself from troubles related to your property. And secondly, you can make money by investing in certain types of liens.
Now that we’ve answered the question “What is a lien?” you can make informed decisions about your real estate and investments.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.