Imagine finding the perfect home and proceeding with the purchase only to find thousands of dollars in debt tied to it. This scenario is the case for more people than you’d think, particularly when the proper research is not conducted and even more so when purchasing a foreclosed or distressed property.
More than half of the property searches PropLogix completes will uncover some sort of issue. The most common of which is an unpaid utility bill. Some of these issues are easily settled before or shortly after closing, but others may turn into costly liens.
While liens on a property can be a complex issue to deal with, title searches and municipal lien searches, like those offered by PropLogix, can thankfully help uncover any hidden debts and start your homeownership off on the right foot.
Hidden Liens in the Pre-Closing Period
Whether you’re living in a village, town, municipality, or city, there are many ways that a lien can, unfortunately, be placed on a property without any notice – specifically in the pre-closing period. This scenario depends heavily on the governing jurisdiction, the service provider, and the type of lien.
When a lien is placed on all assets an individual owns, it’s called a general lien. An example of this is a creditor obtaining a judgment lien on all assets belonging to the borrower.
When the lien attaches to a particular property and not the general assets of a person, they are called specific liens. A mortgage is an example of a specific lien since it is only tied to that specific property.
When someone buys a new home, it’s common for the title company handling the closing to conduct a professional title search to look for any defects on the title. The title search verifies that the current seller is the rightful owner and can sell the property, uncovers any recorded liens, and looks for any restrictions or allowances that are imposed on the property.
Beware of the “Gap Period”
Being that there are closing deadlines, a title agent will run a title search at the beginning of the transaction process to meet those deadlines, so there is time to find and remedy issues before closing. However, a service provider may file a lien against a customer at any time. If the lien is attached to the property and not the owner’s account, it could become a problem for the new homeowner. This is often because the service provider already attempted to collect from the previous homeowner unsuccessfully, and now they have the right to recoup the money from the new owner.
This time period between the title search and the closing date where a lien could be recorded without noticing is often called the “gap period”.
More risk is involved when the closing date gets pushed out due to unforeseen delays and the title search is not updated. Aside from this gap, there are often delays between when a claim has been filed and when the lien is fully recorded, which means a lien would then only appear after the closing has taken place. So how can someone protect themselves?
Increase Protection with Municipal Lien Searches
Title insurance is an added layer of protection against liens or other title-related issues, however, it is typically protection against recorded liens and will only protect the homebuyer for issues related to them. This is where a municipal lien search becomes essential for protecting the homebuyer because it essentially expands the search for unrecorded liens or unrecorded debt.
Any issues found in this search can be covered by title insurance as long as it’s written into the policy – even for municipal liens that appear after closing and during homeownership that were the result of the previous owner’s neglect. Many people didn’t need to opt for the municipal lien search in the past, but slowly it’s becoming common practice. Work with your local title agent to understand how common they are in your state.
Here are some of the liens that are typically looked for in a municipal lien search:
- Utility Liens
- Service or Inspection Liens
- City Services Liens
- Code Violation Liens
- Special Assessment Liens
- Local Tax Liens
As mentioned earlier, the issue with unpaid utilities arises when liens have not yet been recorded by the local municipal office and thus will not be uncovered from a standard title search. This can occur during the gap period that was mentioned earlier, or during a new homeowner’s tenure.
Because utility services like water and sewage are specific to a property, a utility lien is also specific by nature, so it will attach to the property.
The right to lien on a property depends on state statutes. More than one governing body may control different utility accounts for a property, depending on its location. Private companies may also have the right to lien for servicers. Tenant-occupied units may be exempt from liens in some states.
Typically the only way a new homeowner will find out about unpaid utilities without a municipal lien search is when they go to turn on those services after moving in. The ledger will provide an account of services and payment, but it becomes the new homeowner’s responsibility to request a final meter reading and know exactly what will be owed.
When a municipality conducts any inspection of your property, say the fire department for code compliance, the bill is tied to the property itself, making these specific liens.
If the current owner does not pay a bill, the claim can be made by the service or inspection provider for a lien to be placed. Again, when the lien will appear in the public record really depends on the timeline of when they submit the claim of debts owed.
Pennsylvania for example requires a dye test to be completed whenever a home is sold or ownership is transferred. When this test is completed the bill is tied to the property and must be paid by the next homeowner if the previous owner did not.
It’s important to work with your title agent who has likely experienced these local requirements before and knows what to expect. They can use that knowledge to search for unrecorded debt in areas that you might not expect.
The services a city provides to its residents aren’t always included in your local taxes. At times, there will be separate charges attached to a property for snow removal, the city-maintained landscaping, and other services. These services again are specifically billed to the property in most cases and therefore the liens are specific as well.
You have to be aware of your new neighborhood’s services because they may offer something unique to their jurisdiction that wouldn’t be offered elsewhere – even in the same city. Again, a municipal lien search will attempt to find these charges for services before closing.
If a title policy lists this information as a requirement in the title commitment, new homeowners should be covered for any missed fines or fees related to municipal services.
A special assessment is a charge levied against a property that has benefited from a public project in the area. This can range from road improvements to water connections, and the charges don’t always appear in the ad valorem taxes on a property.
It’s crucial to search in the public record of the municipality for the names listed on the chain of title, not just the most recent owner. The special assessment isn’t always attached to the current owner so it helps to run the search under the previous owners as well.
Common code violations for weeds, debris, and other issues presenting public safety issues often accrue fees quickly if left unremedied because they want people to deal with the problems promptly. In some cases, the county or city may hire workers to correct the problem if the owner remains noncompliant. The charges for these services will be associated with the property.
It’s important to know that information related to code violations can be updated on a weekly basis by the local municipality, resulting in missing the official recording between the title search and closing date.
A municipal lien search helps by requesting all information on pending violations that have yet to be recorded as an official lien.
Homeowner’s Association (HOA) Liens
Similar to a services lien, an HOA lien (or Condominium Owner’s Association/COA lien) is something that can result from unpaid dues or fines from a previous owner. HOAs offer a variety of services in the respective community, such as snow removal, landscaping, amenities maintenance, and more.
Any unpaid HOA liens or fees stick with the property despite a change in ownership. These liens have the potential to lead to losing the home in a foreclosure auction.
Sometimes, one property may have multiple associations governing it. This is often the case in communities that have subdivisions and extensive amenities. To protect a homeowner from an HOA foreclosure auction or paying fees related to the previous owner’s activity, a title agent will order an estoppel letter or resale demand letter for each HOA.
Like municipalities, HOAs liens aren’t always files in the public record right away. There are also a variety of fees associated with an HOA upon joining, which you can read more about here. If buying in an HOA, it’s crucial to review the paperwork the association sends back after an estoppel request. A new homeowner needs to know all the community guidelines and monthly fees to determine if the community is right for their lifestyle and budget.
Also known as a materialman’s lien or a contractor’s lien, a mechanic’s lien results from an unpaid contractor or subcontractor.
Contractors are considered secured creditors and therefore have a legal interest in your property, making this a specific lien. If the home is going to be sold, the seller is expected to pay the debts before that occurs. This type of lien could be placed on a property before or after closing, depending on when the contractor comes to collect and on the state laws.
Being that a contractor or builder is a private individual, a lien placed by one will not show up on a municipal lien search like utilities or city services. However, a municipal lien search with a full permit history search can help uncover if any recent work was done on your property. With that knowledge, a savvy buyer can ask for a lien waiver and avoid getting saddled with a 27k mechanic’s lien like this couple.
Unique from a city or municipal lien, a judgment lien can be very serious for a homeowner as they are also a specific lien, and your house is put in danger. When notices via telephone, mail, in-person visits, etc., have gone unanswered by a borrower, a private provider of services such as a credit card company or personal loan provider can take matters to the municipal level.
There are state-specified time limits in all 50 states for how quickly the creditor must take their claim to court and effectively sue the debtor.
If they win the case, a “certificate of judgment,” from which the name judgment lien stems, is granted. The creditor will then take this certificate and give it to the county land records office as their notice of winning the case. The lien is officially formed, and because judgment liens are involuntary, they don’t need your acknowledgment to place the lien.
In a worst-case scenario, after the creditor files a judgment lien, they can request a writ of execution, where they then proceed with a foreclosure on the property – no matter the owner. This is where the danger lies because, at any given time, claims can pop up for services rendered, unpaid utilities, and more.
The lien won’t form until the creditor takes further action, as outlined above, and therefore the timeline lies in the hands of the creditor, but it greatly depends on the severity of the debts owed.
Although many of these hidden problems (apart from judgment liens and mechanic’s liens) are commonly found during a municipal lien search, each region will have unique caveats as to what local entities have the authority to place a specific lien on a property.
Despite the public record providing the official “notice” of a lien on a property, enforcement of liens is not guaranteed to be immediate. Working with a local title company that will craft a policy that protects against common local municipal issues expands a homeowner’s protection against pending problems and liens filed during the gap period.