What You Should Know about Liens for the Real Estate License Exam
Real estate liens are financial claims against property. A lien exists with certain characteristics, which you should know for the Real Estate License Exam. How and why you permit someone to place a lien on your property has to do with the type of lien to which you’re subjected.
Creation and removal of liens
When you borrow or owe money, your real estate frequently becomes the security, called collateral, for that loan or debt. Collateral is an item of value you pledge in return for securing a loan. Thus the real beauty of a lien for a lender is that it stays with the property, regardless of who owns it, until the debt is paid. This helps guarantee payment of the debt.
When a lien is attached to real estate, it can limit ownership in a couple of ways. It can
Mean the property can be sold against your will to pay off the debt, such as for nonpayment of the mortgage or taxes.
Show up when you sell your property. Because the new owner doesn’t want to pay your debts, you have to pay what you owe to clear the debt and remove the lien before the property sale can be finalized. If you don’t have the money to pay the debt when you sell the property, the debt then is paid from what you get from the sale.
Who gets paid first? Priority of liens
One characteristic of liens, the one that exam writers like to ask about, is called the priority of liens. It refers to who gets paid first when property is sold against the owner’s wishes to satisfy a number of different debts. It also is referred to as the position of the person being paid, such as the mortgage is in first position after taxes.
The first person paid from a court-ordered sale of a piece of real estate is the government. Real estate taxes take first position in the payment of liens. If several liens are attached to the property and one is for unpaid real estate taxes, the real estate taxes are paid first, including any special assessments, or special taxes above and beyond the general real estate tax.
Payment of general and special assessment taxes takes priority over all other liens, regardless of when the liens were attached. Sometimes, because of too many liens, a property may not be able to be transferred or sold, primarily because not enough money can be gained from the proceeds to pay off the debt.
Liens’ distinguishing traits
All liens have two specific traits: They’re either voluntary or involuntary, and they’re specific or general:
Voluntary or involuntary: You either agree to have a lien put on your property or it’s put there against your will.
A voluntary lien is where the property owner willingly takes some action that enables the placement of a lien against the property. A mortgage is the most common example of a voluntary lien.
An involuntary lien is placed on the property against the owner’s will. If the property owner owes money to someone, such as the tax collector, and the owner doesn’t pay, a lien is placed on the property.
Specific or general: One other characteristic of a lien is identifying how many separate pieces of real estate it can be attached to.
A specific lien attaches to only one property.
A general lien attaches to a number of properties.
Types of liens
You may wonder what types of liens can be put on real estate. Pay particular attention to whether the liens are general or specific, and voluntary or involuntary. For some reason, state test writers love asking at least a few questions about these four types of liens:
Tax lien: A tax lien is placed on real estate for unpaid real estate taxes. Remember the government organization is paid first. Different levels of government from cities, towns, and counties can place tax liens on property. Tax liens are involuntary and specific.
Mortgage lien: A mortgage lien is a voluntary, specific lien. In fact, it’s the most common type of voluntary real estate lien. When you borrow money to buy or refinance a piece of real estate, you give the lender a lien against the property. Some states call this a deed of trust lien.
Mortgage lenders usually make sure that no other liens take priority over their lien and that they have what is called a first mortgage lien. Any other liens are called junior liens.
Mechanic’s lien: A mechanic’s lien is a lien placed on your property for nonpayment for work you had done on the property. A mechanic’s lien is involuntary and specific.
Your state may allow brokers to place liens on real estate for unpaid commissions. This practice varies by state and may vary by whether the commission was earned from a sale of property or a lease negotiation.
Instead of a lien, your state may permit brokers to place a lis pendens on the property. A lis pendens isn’t a lien but instead is a notice of a potential future lien. It’s recorded in the public records to give notice to future buyers of the real estate.
Some states permit brokers to place disputed commission funds in an escrow account while the disagreement is resolved. This is not a lien.
Judgment lien: Judgment liens, sometimes just called judgments or money judgments, usually are created as a result of a court action.
When property is sold for nonpayment of mortgage debt, tax liens are paid first from the proceeds, usually followed by mortgage liens, and then by other liens (mechanic’s and judgment liens, for example) in the order in which they are placed on the property being sold.