If you are beginning to build your property investment portfolio, foreclosures and property sold at tax lien auctions may be a great way to start. Make sure you know what you are getting involved in though. Things may not always be as simple as they appear on the surface.
Here’s a primer to get you started. We recommend always working with a professional to track down property details. Give us a call, we’ve been doing this a long time and will leave no stone unturned to make sure you know everything you need to know about the tax status of a property before you buy.
What is a Lien?
A lien is essentially any claim made against a property owner in an effort to collect a debt. A mortgage is a voluntary lien, entered into by a property owner and lender for mutual benefit. A court can order a judgement lien against a property when an owner is sued by a third party seeking repayment of a debt. An IRS tax lien is applied to a property for failure to pay federal income tax. Liens can also be attached for failure to pay property taxes, mortgages, and in some cases to satisfy the payment of a bail bond, money owed to a contractor or other service provider who has done work on the house, or an unpaid utility bill.
Who is Responsible for Paying Liens?
Good Question. The answer is, it depends. Typically, these rules apply. Most liens, whether they are placed on a property by a mortgage holder, the IRS, or a state tax agency, are prioritized by the date they were attached. The first lien is the first to get paid by the sale of the house. There are exceptions. In some states, a property tax lien will jump ahead of all others regardless of where it falls in line with other obligations.
When a bank forecloses on a home, all subordinate liens are detached from the property. This does not mean that the debts are no longer owed. Lien holders can still pursue other legal avenues to collect what’s owed.
The satisfaction of all mortgage debt does not mean you are necessarily off the hook if you buy a foreclosed property. That’s why it is very important to work with a profession who knows how to uncover any liens and understands the difference between subordinate and superior liens. In many states, an HOA assessment or lien takes priority to a mortgage lien. So, while the mortgage may be satisfied by the foreclosure process, responsibility to pay the assessment or lien passes on to the new property owner. This can tank your plans to make a quick profit on your investment property. Imagine buying a home in a community where all owners have recently been notified of a $40,000 special assessment for the repair of construction defects. If you don’t know about it and complete your purchase, you are on the hook for that assessment.
This is just an overview of the types of problems you can come up against if you don’t do thorough research. Are you starting to understand why it is important to work with a professional?
Call the experts at Allegiance Abstract Services Inc. today to make sure you don’t get caught with a debt you shouldn’t owe.