One of the challenges when purchasing an investment property is understanding how liens may change the price. While all the success factors may line up on a home, including location, capitalization rate, and the renter’s market, unknown liens can turn the dream of a passive income opportunity into a nightmare quickly. That’s why every investor is advised to check for liens on a property before making an investment decision.
Before jumping into the world of real estate auctions, it’s critical to understand how to find liens on properties. By understanding what financial challenges may be hanging over a potential investment home, you can make a better-educated decision on when to buy and when to pass.
What Is a Lien on Property?
In simple terms, a property lien is a claim held on real estate for unpaid debts. There are several types of property liens, ranging from those placed by a homeowner’s association (HOA) to government agencies for unpaid taxes. That’s why it’s critical to check for liens on property before placing a bid: Not knowing the financial history can add to the expenses you will have to pay upfront before getting the keys.
When checking for liens on property, there are four specific situations to look for:
Mortgage Liens: The first place to check for liens on a property is with the mortgage company. Mortgage liens are often the reason for foreclosure sales and could add additional requirements before taking possession.
Tax Liens: If the previous homeowner did not pay their property tax, you could be required to pay all the taxes due before you are able to take possession.
HOA Liens: One of the more uncommon situations, a homeowner’s association can put a lien on a home for nonpayment of dues. When checking for liens on property, be sure to see if the HOA has a claim and how much in dues are owed before you can take the keys.
Mechanic’s Lien: Another uncommon claim, contractors who performed work on the home but did not get paid can request a mechanic’s lean on the deed. If you find this situation when checking for liens on property, be sure to understand how much the contractor is claiming and add that to your buying budget.
How to Find Out About a Lien on Property
Although liens can often complicate investment property purchases, you don’t have to go in blindly. Understanding how to check for liens on a property can help you determine if real estate for sale is a good deal or would create more financial challenges than you are prepared to manage.
The good news is that all liens are a matter of public record. In most situations, checking for liens on property is a matter of reading the fine print on a real estate sales listing. In many cases, the liens will be listed as part of the sales report, helping you to understand what you may be responsible for upfront. If they are not listed, you will have to do a property lien search.
Property Lien Search
If the claims on a plot of real estate have not been listed, you want to check for liens on the property before placing your bid. There are two ways to find potential liens: doing the research yourself with the local government or hiring a title company to do the work.
Should you decide to search yourself, you will need to know how to check for liens on a property. Looking for liens starts with a search at the county office responsible for recording real estate transactions. In most cases, it will be the county recorder, county clerk, or county assessor’s office. While you may be able to search for a free online report, purchasing a report will give you all the details on the lienholder and claim amount. The report fees vary from county to county.
If you decide to hire a title company to check for liens on the property, their staff will do all the title work to ensure the transaction runs smoothly.
Make Property Lien Search Part of Your Due Diligence
Understanding how to find liens on a property is not just a key part of the real estate buying process – it’s a critical step to preparing to take on a new investment and correctly managing it as part of your portfolio. Just as investors in stocks do research and read prospectuses to determine if buying share of a company is the right fit for their portfolio, checking for liens on property can help buyers understand the circumstances and situations leading to a bank-owned sale. In turn, it can help buyers make a decision if this is the right passive income opportunity.
Once you understand how to check for liens on a property, it should become an integral part of your research on any investment property. Taking the time to do the background research on a potential investment can make you a smarter investor and ultimately help you make the best decisions for your money, adding even more value to your investment portfolio for the future.