Priority of Liens

by Dave Miller

When owning a property a lien can be placed against the property.

A lien is an encumbrance on the property to gain an interest in the ownership of the property. It is a charge or claim against a property made to force the payment of a debt by the owner. This is done to collect taxes or money owned to someone else. Real estate taxes, mortgage liens, IRS liens or mechanics liens are the types most commonly seen.

There are voluntary and involuntary liens.

Voluntary liens are placed against a property with the owner’s consent, meaning you agreed to the lien. This is commonly done with a mortgage. You are allowing the bank to place a lien against your property that says they can force the sale of it if you fail to fulfil your commitment. By forcing you to sell they then get to collect the money owed to them, and an exuberant amount for additional fees. They would need to take you court but you can lose your property if you fail to meet the agreed upon obligations of the mortgage.

An involuntary lien is one that you did not mutually agree to. This may be from unpaid taxes or bills. When you fail to make payment of a debt, the person you fail to pay can place a lien on your property. This is usually done without your consent.

Order of liens

Real estate taxes take precedence over other general liens. You can have a mortgage on a property but if you fail to pay your taxes they (the taxes) will be paid off first if your property is sold.

Priority of liens refers to the order in which claims against the property will be satisfied (paid off). The rule generally on the priority of liens is “first come, first served.” Liens take priority from the date of recording in public records of the county where the property is located. This position is especially desirable if the lien must be enforced by a court-ordered sale or when the property value drops below the amount of the liens.

There are exceptions to this rule. Real estate taxes and special assessments generally take priority over all other liens, regardless of the order in which the liens are recorded. This means that if the property goes through a court sale to satisfy unpaid debts or obligations, outstanding real estate taxes and special assessments will be paid from the proceeds first. The remainder of the proceeds will be used to pay other outstanding liens in the order of their priority. Mechanics’ liens take priority as provided by state law but never take priority over tax and special assessment liens. Then if any money is left you finally get your share.

There are two types of real estate taxes: general real estate taxes (also called ad valorem taxes) and special assessments or improvement taxes. Both are levied against specific parcels of property and automatically become liens on those properties.

Either way you slice it, liens are a pain in the deed.

If you are buying a property, be sure to get an attorney to do a title search and purchase title insurance. By doing a title search the attorney can see if any liens or encumbrances are attached to the property. By getting title insurance the burden of a rogue lien that slipped under the searcher nose is placed on the searcher. You can get the lien paid by the insurance company that you paid the fee too, and you walk away free of the lien.

It costs a few dollars to buy title insurance but the safety easily outweighs the risk.

Published in: on August 28, 2010 at 10:30 am  Comments (1)  
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