In short, yes, you can sell a house with a lien on it. However, this does not mean you should sell a house with a lien on it. Liens can delay the closing process and cause headaches for the buyer and seller. Depending on the amount of equity the seller has in the home will determine how selling a property with a lien on it should be handled. We explore the different types of liens and how to sell a house with a lien on it in this article.
Types of Property Liens
There are voluntary and involuntary liens that can be placed on real estate. Mortgage liens are voluntary, as your mortgage is what enables you to afford the home. Aside from your mortgage lien, when selling a house with a lien on it, you are usually dealing with involuntary property liens. These are liens placed on your property by creditors to which you owe money such as the IRS, the state, contractors, or your homeowner’s association (if your property has an HOA).
Property Tax Lien
A property tax lien is placed on property when the homeowner failed to pay property taxes to the state. This is a considered a super-priority lien and proceeds the pay-off of any other liens, as well as your mortgage regardless of the date recorded. This means the state collects the unpaid property taxes before anyone else collects their outstanding debt.
The IRS can place a lien on your property if you fail to pay federal taxes. Typically you will have received several notices from the IRS about the unpaid taxes you owe before a federal tax lien is placed on your home. The government will want this lien paid off in full before they remove the lien, but there are special cases where the impact of the lien can be reduced lowering the debt.
A mechanics lien (also known as a Materialman lien) is placed on a home when the homeowner failed to pay contractors for work they did on the property. The contractor must send a notice of intent to file a lien after failure to receive payment. Upon payment the lien can be released; however, if the contractor is still not paid, the lien can be enforced via court action. If the contractor wins the lawsuit, the lien must be paid.
Homeowners’ Association Lien
If your property has a Homeowners’ Associations (HOA), you are required to follow the HOA’s Covenants, Conditions, and Restrictions (CC&Rs). This typically includes paying HOA fees and abiding by the rules of your HOA. Failure to abide by the CC&Rs can lead to the HOA placing a lien on your property.
How To Sell a House with a Lien on It
Since liens are public record, if you have a recorded lien on your house, it will most likely be found in the title search. The title search takes place as part of the closing process on the home. A lien on your home can delay closing or cause the home sale to fall through depending on the seller’s ability to pay off the debt. Notify your real estate agent of any existing liens, so the agent can set expectations for the closing timeline to the buyer’s agent. Depending on your situation, there are 5 options for selling a house with a lien on it.
1. Payoff the Lien on Your House
The fastest way to sell your house with a lien is to pay off the lien before selling your home. However, depending on your financial situation, this is not always possible.
If you have enough equity in your home, you can pay off the lien at closing by cutting into your profits on the home sale. For example, you sell your house for $400,000 with a $200,000 mortgage and a $20,000 tax lien. You will profit $180,000 to pay off the remaining mortgage and tax lien at closing minus the remaining closing costs and agent fees.
If you are lacking equity in your home, you may have to bring money to closing. For example, your house sells for $400,000 with an outstanding mortgage of $385,000 and a $20,000 lien on the property. You will owe $5,000 towards the remainder of the lien, as well as closing costs and agent fees.
2. Negotiate your Lien with the Creditor
A homeowner unable to afford the outstanding lien may be able to negotiate with the creditor who placed the lien on your property. Negotiations should involve an experienced attorney or CPA to settle the lien. This could result in a reduced amount owed to your creditor, or it could result in a hybrid solution if you own other real estate that could allow the lien to be transferred.
3. Transfer your Lien to Other Real Estate
In some cases, your property lien can be transferred to another piece of real estate you own. An attorney should be involved in these negotiations, but if successful, transferring your property lien would allow you to defer paying off the lien. It would also clear title on the home you are selling allowing closing to take place.
4. Transfer your Lien to a Buyer
Certain circumstances can lead to the buyer inheriting the lien. This is commonly seen with distressed properties at auctions or with foreclosed properties. Further, some real estate investors may not be deterred by a lien if they’re planning to invest via Subject-To.
Don’t expect to transfer your lien to a retail buyer. Retail buyers can pay for title insurance, which guarantees they will not inherit any liens missed by the title company.
5. Dispute the Property Lien
If a lien is found during title search that you already paid off, it’s possible the creditor did not remove the lien. It’s your responsibility as the homeowner to contact the creditor and resolve the lien. Make sure to keep any records when paying off a lien in case you need to provide proof of payoff.
Can a Property Lien Stop My Home Sale?
If you have a legitimate lien against your property that you’re unable to payoff at closing or negotiate with the creditor then yes, a lien can stop your home sale. Since liens are public record, you don’t have to wait for the title company to find any liens… To avoid being unable to sell your house, you can do a lien search on your property to verify any outstanding debt. This will let you figure out how to payoff the lien before it causes delays or completely stops you from selling your home.
Final Thoughts: Can You Sell a House with a Lien on It?
Selling a property with a lien on it can be done. However, you should go into your home sale fully aware of any property liens, so you can pay off the debt and avoid closing delays. By being fully transparent with your real estate agent, so you can wrap the cost of the lien into closing or get referred to an attorney for any disputes or negotiations.