When planning to buy a house at a foreclosure auction, it’s essential to know of there are any liens on the property. So how do you investigate foreclosure liens?
Liens to Look for When Buying a Foreclosure Auction Property
There are multiple types of liens that can be placed against a property which. You should look for all of these when investigating foreclosure liens.
Here lien types you can expect to find when you investigate foreclosure liens on a property:
- Judgement Liens (divorce, alimony, healthcare bills, etc.)
- Mortgage Liens
- Property Tax Liens
- Federal or State Income Tax Liens
- HOA Liens
- Utility Liens
- Mechanics (Contractors) Liens
Knowing what these liens are can aid you in making the right decisions when buying a foreclosed home.
Easements affect the ways in which the owner or related parties may use the real estate property. For example, easements may affect an owner’s right to cut down trees, build storage buildings or garages, or extract minerals from the soil on the property.
A common easement is a right-of-way easement. This occurs when one person or group obtains the right to cross or use another person’s land for a specific reason. For example, driving across to reach his own property, or walking across to reach a public beach.
Investigating Judgement Liens
Judgement liens are court orders that formalize an owner’s unpaid debt to another person or entity. This can be a lender, a service provider (contractor for instance), an ex-spouse or any party that’s obtained a judgement against the property owner. Judgement liens can include interest, legal fees, and court costs.
The property owner must make full payment to satisfy the judgement, then petition the court to lift the lien, before the property can be sold with a clean title.
The challenge with judgement liens is they are often not properly recorded. There is a difference between getting a judgement against a homeowner (aka judgement debtor) and getting a lien on the homeowner’s property. The first step is required before the second step can occur — and this second step is often not completed.
When doing a judgement lien search, it can also pay dividends to do a judicial judgement search as well. If the homeowner has a large judgement amount from an ex-spouse for child support, or a contractor who put a new roof on and never got paid, then it’s possible these judgements could become liens. This can help head off judgement holders coming “out of the woodwork” and approaching you with judgement claims to be paid after you’ve bought a house at auction.
Investigating Mortgage Liens
When a homeowner takes out a mortgage loan, it is secured by the property through the creation of a mortgage lien. The bank owns the unpaid portion of the property and the lien amount reflects this.
The property owner cannot sell the property without paying off the mortgage. Therefore, transfer of clean title is “subject to” the mortgage lien being paid off (usually through the proceeds of the sale).
Mortgage liens can be held by first, second and third mortgage lenders. They are almost always recorded, and therefore are easy to spot. However, only the mortgage owned by the foreclosing bank will be paid off by the auction. Keep this in mind, because you may end up paying another lender off after the auction (usually a second mortgage) to get clean title.
Investigating Property Tax Liens
Property taxes are generally paid to city and county tax authorities. When property taxes are unpaid for long enough, the tax assessor will record a lien against the property for back taxes. These are easy to find.
In some cases, a homeowner may be one to two months late on property taxes, and a tax lien may not have been recorded yet. Back taxes on a property can often be checked with the local tax assessor’s office. Most foreclosure auction properties have some back tax issues, so you should assume taxes will be due prior to getting clear title.
Local tax authorities often sell off their tax liens to investors, rather than attempting to collect on them. So the tax lien may be owned by someone else. When purchased, the transfer of the lien’s owner will generally be recorded. Keep in mind that if you buy a foreclosure auction house you may need to write a check for back taxes to somebody other than the city or county.
Liens, or essentially any unpaid bills that must be satisfied before the home can be sold, are filed against a property before the homeowner can turnover a property. Such liens are typically satisfied with any net profit from the sale of a home. Therefore, before exchanging hands on a property between seller and buyer, liens must be payed off.
The Foreclosure Lien Search Process
Liens are placed on public record, therefore, are available when conducting a title search through county property and assessor offices.
You may also find foreclosure lien information online, as many counties display property titles and lien information on the web.
All you need to investigate foreclosure liens is the name of the homeowner or the address of the property.
A title search can be conducted by hiring a title company to do it for you, or doing it yourself. In most cases, hiring a title company is more efficient and thorough. They know the ins and outs of dealing with recorders offices, finding old records, and keeping track of local property histories.
Local real estate agents who specialize in foreclosures can also help to investigate foreclosure liens that you need to remove. They can also help determine who the lien even belongs to (a common problem with tax liens held by out of state tax lien investors).
After conducting your lien search, you will be able to estimate the total balance owed on the liens. The balance will be broken down into principle balances and “arrears,” which are one or more missed contractual payments such as those of mortgage, rent, or utility bills.
Understanding Lien Priority is Essential
As a general rule, liens receive priority based on the date they were recorded. However, special priority rules govern particular types of liens.
Tax Liens generally have first priority. This means tax liens must be paid first to get clean title.
HOA Liens may have second priority in front of Mortgage Liens in certain states.
Mortgage Liens, especially first mortgages, usually hold priority over all other liens.
Tax Liens Must Be Paid First
In most foreclosure auction cases, it’s the mortgage lender that has foreclosed on the home and taken it to auction. However, when you buy a foreclosed house at auction, the proceeds will often be allocated to pay off tax liens first, then the mortgage lender’s loan balance, legal costs and auction fees. This respects the priority of tax liens.
If back taxes are not taken out of the foreclosure auction proceeds, then the property’s title will transfer with the tax lien still attached. If you’re the winning buyer at auction, you will then need to pay off the tax liens before getting clear title.
Junior Liens Are Extinguished by Foreclosure Auctions
Following foreclosure, any junior liens to the foreclosing lien are normally eliminated or “extinguished”. This means if the first mortgage lender forecloses and the house is sold at auction, then any second or third mortgage lenders’ lien is eliminated. The new owner does not have to worry about paying off second and third mortgages.
Depending on the state you’re in, HOA liens and mechanics (contractors) liens may have special treatment, however. The reason is the investment a homeowner’s association or building contractor have put into a property continues to benefit the new owner.
Therefore, sometimes these liens are not extinguished in a foreclosure auction situation, and you may be faced with paying off these liens after you’ve bought the property.
When considering buying a foreclosed property, it is important to investigate any foreclosure liens. Understanding the full amount of outstanding liens will help you determine if the property you are looking at is worth buying. These added costs may prove to be more costly than initially expected. Make sure to do your research and investigate any
liens before buying that house you’re interested in at a foreclosure auction.