Real Estate Explained: How Can Liens and Encumbrances Affect You?
It's tempting to act quickly when you spot a good real estate deal, but being too hasty can backfire if you unknowingly purchase a property with liens or encumbrances against it. Before you make an offer on a potential rental property, make sure you understand how liens and encumbrances can affect the transaction.
What Are Liens and Encumbrances?
A lien is recorded against a property when there is money owed relating to the property. An encumbrance may exist when there are other people who still have an interest in the property. There may be a lien on the property due to a judgment against a previous owner, a fine by a city or homeowner's association or even an unsatisfied mortgage. Encumbrances may include disputed property lines, easements or interests that other people have in the land. If you take title through a quitclaim deed, you only get the ownership interest your seller has at the time of the transaction.
Discovery of such problems usually arises when properties are purchased at a foreclosure sale or when the landlord obtains ownership of the property through a quitclaim deed. Sometimes, title insurance policies can protect you from these problems.
It's important to be aware of any potential financial issues if you buy a foreclosed property. The bank may not have foreclosed out all of the potential interest-holders in the property and money may still be owed to these people or companies at the time of the sale. If the previous owner hired contractors to work on the property, they could have filed a lien on the property to ensure that they were paid for the work they did.
Check Public Records to Prevent Surprises
Landlords can check public records to see if there are any liens or encumbrances recorded against the property. Some states, counties, cities, and towns provide online records, while others require you to go to a public office to do a search. You can search property records by the owner's name and by the property address.
If you do find any liens or encumbrances, check for satisfactions or releases to show that the encumbrances have been removed. The satisfaction or release will reference the lien or encumbrance by date and usually by book or page number. It's important to check to make sure the release or satisfaction matches the lien or encumbrance you found.
You can also check the court records to see if there are any other lawsuits against the previous owner. For example, Connecticut has a website that allows you to check the dockets of different types of cases, and Florida provides a central site with links to individual courts. Construction lawsuits, foreclosures, and divorces are only a few of the types of lawsuits that can result in liens or encumbrances. Probate or guardianship cases can also affect the title to the property. You may also want to look at the deed by which your owner obtained title and at the property appraisal information (available from the local property appraiser), which may give your information about any other owners of the property.
Use Your Contract to Protect You
These potential issues should be addressed in the contract you use to buy the property. If you spell out in your contract that the seller has to fix any problems before closing, then the burden is on the seller to provide you with evidence that the lien or encumbrance has been removed.
If you do find documents that indicate that there might be a problem with the property, a phone call to the party who filed the lien may easily resolve it. Sometimes, releases are recorded in the wrong place or not at all. Other times, however, you might find a serious problem that can only be resolved by your seller or by the legal system.
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