Whether you are a seller or a buyer, when dealing with a short sale house, it can be complicated to deal with liens. Knowing how to eliminate liens on a short sale house can help alleviate these issues and speed up the purchase.
Why You Must Eliminate Liens From a Short Sale House
It is important to eliminate any liens quickly from a short sale house, whether you’re the seller or buyer. Failing to do so will ward off potential buyers and their mortgage lenders.
Lenders Won’t Approve a Short Sale of a House with Liens
In many jurisdictions — if not most — you cannot properly transfer title of a house that has liens recorded against it. Because clean title does not transfer, the sale will not be fully consummated and there is potential that the seller will be liable for paying off the liens from the proceeds of the sale.
For this reason, a bank will not agree to a short sale of a home that has liens (other than the bank’s mortgage) recorded against the title. Banks agree to short sales because they view it as a cheaper and faster option than foreclosure auction (which does eliminate junior liens). The bank will agree to take a loss on the mortgage, but only if the sale is clean.
Therefore, in order for a homeowner to sell a house short, he or she will need to pay off any junior liens first, or the bank won’t approve it.
You Could Lose the House if You Don’t Eliminate the Liens
If the lien debt is too large, you risk having the house confiscated and sold to cover outstanding liens. A lien holder can foreclose and sell the house at auction to recover its money due.
Liens Will Reduce Your Sale Price
If you’re looking to flip a short sale property you’ve purchased, then leaving liens on the title will automatically reduce the price a buyer is willing to pay for it. They think “where there’s smoke there’s fire” and assume there are potentially other unrecorded liens lurking in the background.
In fact, the offers you get will probably be lower than the sum of the lien amounts. This is due to the time and legal expense required for the buyer to clean them up.
Banks Will Not Lend Against a House With Liens
Banks only make mortgage loans on properties with clean title. This is to protect the bank in the event of a default. The bank needs to know that the homeowner, or in a worst case scenario the bank itself, can sell the property easily and recover the mortgage amount.
In most cases, only a hard money lender or private investor will lend against a property with liens attached to the title. These are more expensive loans with fewer borrower protections.
A Clean Sale With Liens is Impossible
Generally speaking, there is no way to transfer title to a house in a normal sales transaction that will eliminate liens on the property. The seller can offer a Quitclaim Deed, but this does not transfer clean title. The liens will still exist after the sale and the new buyer will need to pay them off.
How to Pay Off Liens On a Short Sale House
Paying off a lien is relatively simple. In most cases you just contact the lien holder and write a certified check or money order for the outstanding lien amount. But doing this correctly is not that simple…
First, using a certified check or money order eliminates the possibility of the lien holder claiming your payment did not occur or bounced.
Second, as a condition of paying off the lien, you must demand two things from the lien holder before making payment:
- The lien holder must give you a letter stating the lien amount, description of the lien, that the lien was paid off, and the method and date of payment.
- The lien holder must record the letter with the county assessor and submit it to the court where the lien judgement was obtained within 10 business days.
Third, you must apply to the court where the lien was granted to release the lien. Submit the above letter and any other proof of payment. The court will generally release the lien and send you a written release within 30 days of reviewing the case.
Being 100% Sure: Handling Hidden Liens
Once you’ve eliminated recorded liens on a short sale house, it might seem like the title is clear. But old debt issues sometimes appear when you’re not expecting it.
This often happens when a lien judgement on the property was obtained by a contractor, ex-spouse, service provider, or personal lender. But the lien was never properly recorded due to cost or administrative error. These “hidden liens” don’t show up on title searches and can wreak havoc.
Get Title Insurance
The best way to handle this is to get a firm title insurance policy on the short sale house you buy. This transfers the risk of an undetected title issue onto the insurance company.
One way to handle “out of the woodwork” liens and save money is to get a “hold open title policy”. Hold open title insurance policies are used when an investor intends to buy and sell the home within 18 months.
With a hold open policy, the title company does not issue a final policy, rather it “holds open” the policy for the next buyer. Once you (the investor) flip the short sale house to a new buyer, the title company issues a complete title insurance policy to that buyer. You sell the property with this prepaid insurance policy included.
How to Eliminate Liens on a Short Sale House – Recap
It is essential that both the seller and buyer in a short sale situation make best efforts to eliminate any known liens on the property. Bank’s won’t approve a short sale with liens on the property, and buyers are not attracted to properties with liens. Knowing how to eliminate liens on a short sale house will alleviate these issues and make your short sale house flip go much better.