Liens Must Always Be Accounted For
By Paul Esajian on February 3, 2014
Anytime you are working on a purchase with multiple liens, it is important not to neglect any of them. This scenario is most prevalent when working with short sales, tax lien auctions and even refinances, but it can pop up on traditional transactions. If the second or even third lien holder is not the same of the first, they follow their own set of rules and have their own expectations for what they should receive. This may or may not be realistic, but if they are not satisfied with the amount they do not have to agree to the deal. Ironing out the details with these lien-holders can tack on an additional few weeks to the transaction, or in extreme cases, cause the deal not to move forward at all.
The position the lien is in represents what number on the pecking order they will get paid in the event of foreclosure. The lower down the line, the less likely they will see any money. That being said, all lien-holders do have some rights to the property and can ruin transactions. On a short sale, the second lien holder can demand say $5000 to satisfy their lien. The first lien holder may only allow for $1500. If a compromise is not met, the deal cannot close unless money is brought to the closing by the seller or some other remedy is met.
Under the previous scenario, both sides lose out. The second lien holder, instead of walking away with something, will get nothing. The seller doesn’t get out of foreclosure or whatever situation they are currently in and the buyer doesn’t get a property they want. This may have not been alleviated by catching it early enough, but you could have saved everyone weeks or months of time and in some cases money. In most cases, a compromise can be met, but if the second lien doesn’t budge it is a real problem.
The same is the case regarding tax lien auctions and refinances. Even if the lien is small, you will still need authorization to close the loan. On a refinance, you can desire to leave the lien untouched, but you will need a subordination agreement from that lien-holder to do so. Depending on the lender, this can take as quickly as a few days or as long as a few weeks. If you start this late in the process, you can lose your rate lock and with the way rates are fluctuating that will increase your payment significantly every month.
Tax lien auctions are a little different, but they still need to be factored in. With a tax lien, you assume first lien position, but you still need to negotiate with subsequent lien holders if you want to take outright ownership of the property. This amount needs to be factored into your purchase price and the title needs to be thoroughly examined before you make any offers.
One of the first things you should do before you make any transaction is to have a title search done and look for any subsequent liens on the property. Finding out as much as you can about these liens as soon as you can will save you time and money. Some of these liens may not be large, but that doesn’t mean they are not important.