Homebuyer Must Knows - Title Search and Property Liens

When purchasing a home, understanding the nuances of the title search process is crucial. This is where homebuyers discover the legal status of a property and any potential issues that could affect ownership. One of the most significant issues that can arise during a title search is the existence of property liens. Let’s break down what a title search entails, the different types of property liens, and how a potential homeowner can resolve these issues before they become headaches.

What Is a Title Search?

A title search is a thorough examination of public records related to a property. The goal is to establish a clear ownership history and identify any claims, defects, or liens on the title. If being conducted by a title company or real estate attorney, this process typically includes:

• Reviewing Deeds: Checking past and present ownership to confirm that the seller has the legal right to sell the property. Property being sold by nefarious or ignorant sellers without the legal right to do so happens more often than you might think.
• Examining Public Records: Investigating court records, tax assessments, and other documents to identify any claims against the property.
• Assessing Title Insurance: Ensuring that the title insurance policy will cover any potential issues that may arise after closing.

What Are Property Liens?

A property lien is a legal claim against a property, typically used as security for a debt. If the debt is not paid, the lienholder has the right to take action, which could include selling the property to recover the owed amount. For homebuyers, understanding the implications of property liens is essential for several reasons:

• Financial Implications: Liens can significantly impact your financial obligations after purchasing a home. Depending on the lien type, you may inherit the debt associated with the property. While these can be considered a worthy expense for, let’s say, your family’s dream home, they can also pop up after a sale if the proper due diligence was not taken.
• Ownership Risks: If a lien is not resolved, it could hinder your ability to sell the property in the future.

Types of Property Liens

Several types of property liens can be discovered during a title search. Understanding these can help buyers navigate potential issues.

Mortgage Liens

These are the most common liens, created when a property is financed through a mortgage. The lender holds a claim against the property until the mortgage is fully paid off.

Example: If you buy a home that has an existing mortgage lien of $200,000 and the seller hasn’t paid it off, you might inherit that debt unless it’s resolved before closing. Inheriting debts may not be covered by your home loan and buyers may be forced to bring more out-of-pocket money to the table.

Tax Liens

Tax liens are imposed by government entities when property taxes are not paid. These can take precedence over other liens, making them particularly concerning.

Example: A homeowner may fail to pay their property taxes, leading to a $10,000 lien. If you purchase this property without clearing the tax lien, you become responsible for it, possibly jeopardizing your financial stability.

Mechanic’s Liens

These are placed by contractors or subcontractors who have not been paid for work performed on the property. Mechanic’s liens can complicate ownership transfers if left unresolved.

Example: Suppose a homeowner hires a contractor to renovate their kitchen but doesn’t pay the final bill. A mechanic’s lien of $15,000 may be filed against the property. If you buy this home, you’ll need to ensure the lien is paid off to avoid liability.

Judgment Liens

These occur when a court grants a creditor the right to take possession of the property due to an unpaid debt. They can significantly impact your ability to take full ownership of the home.

Example: If a previous owner was sued and a judgment lien of $50,000 was placed on the property due to unpaid debts, you may need to settle this before the title can be transferred to you.

HOA Liens

Homeowners Associations (HOAs) can place liens for unpaid dues. These liens can become a significant burden if not cleared before closing.

Example: If the previous owner failed to pay their HOA dues, a lien for $2,000 may exist. As a new buyer, you could be held responsible for this debt.

Resolving Title Issues Before Closing

As you may have noticed, to avoid complications with property liens, it's essential to address any discovered issues before closing. Unfortunately and all too often, liens are unknown and therefore left unaddressed before it's too late. Here are some steps to take to avoid this stress:

1. Work with a Title Company

Partner with a reputable title company that can conduct a comprehensive title search. They will identify any liens and provide a detailed report.

2. Negotiate with the Seller

If liens are discovered, you can negotiate with the seller to resolve these issues before closing. This may involve:

• Paying off the lien from the seller's proceeds at closing.
• Negotiating a reduction in the purchase price to accommodate the lien amount.

3. Obtain Title Insurance

Title insurance protects buyers from unforeseen issues, including undiscovered liens. Make sure to purchase a policy that covers potential claims against the property.

4. Seek Legal Advice

In complex cases, especially those involving significant debts or legal disputes, consulting with a real estate attorney like those at Guida Law Offices can provide guidance on how to resolve the lien issues effectively.

Hazel, a first-time homebuyer in West Virginia finally found her dream starter home after searching for nearly a year. The seller was cordial, her offer was accepted, and Hazel was excited to move in as soon as possible. However, during the title search, her real estate attorney discovered a $25,000 mechanic’s lien from a contractor who had performed work on the home.

The seller had forgotten (sincerely or otherwise) to mention this outstanding debt, and Hazel was faced with the prospect of inheriting the entire amount. Fortunately, she had opted for title insurance, which covered the lien. The title company worked with the seller to negotiate a payoff before closing, allowing Hazel to purchase the home without financial liability for the contractor’s debt.

Unfortunately, without the support of a reputable real estate attorney and title insurance, Hazel would have likely inherited a sizeable portion (if not all) of this mechanic’s lien and her dream first home may have turned into a nightmare money pit.

The Importance of Due Diligence

Homebuyers should never underestimate the importance of conducting a thorough title search. Understanding the potential implications of property liens can save you from unexpected financial burdens and legal headaches. By proactively addressing title issues and working with experienced professionals, you can confidently navigate the homebuying process and protect your investment.

As you begin on your journey to homeownership, remember that knowledge is your greatest asset.

Stay informed, ask questions, and don’t hesitate to seek assistance from professionals like the folks at Guida Law Offices when needed. Your dream home awaits, and with the right preparations, you can enjoy it without any lingering legal concerns.