Although the quantity of short sale home sales are on the decline, there are still a large number of these discounted properties available for the astute buyer. According to RealtyTrac, the nation’s leading source for comprehensive housing data, states that U.S. residential properties, including single family homes, condominiums and townhomes, sold at an estimated annual pace of 4,402,741 in one month.
But finding these deals is only the first step. Many people looking to purchase these homes know to look for structural damage, they make sure the roof and electrical work and make sure that the plumbing is up to date. What many forget to check is the seemingly hum drum world of liens. Liens are not as “sexy” as the real estate re-dos made popular by HGTV, but ignoring liens can have as much, sometimes more, impact on your successful buy as a modern kitchen and open floor plan.
A lien is a notice attached to property telling the world that a creditor claims the homeowner owes it some money. A lien is typically a public record and are a common way for creditors to collect what they are owed.
It is possible for multiple people have a lien on the home you are intending to buy. It can be the contractor who was never paid for work he did. It could be a second or even third mortgage the homeowner put on the home. It may be the HOA putting a lien for nonpayment of dues. It can even be the IRS, State or local government looking to recoup back taxes not associated with the property in question.
So? What’s the Big Deal?
The big deal is, if you do not find out about these liens and address them BEFORE you purchase the property, you may end up owing it AFTER you close. Rest assured, modern closing tactics typically find these liens before closing, however, you would hate to be choosing curtains for your future home only to find out that there is an additional $50,000 owed to some person some where and, unless the seller intends to pay the tab at closing, they can’t sell and you can’t buy.
Some Good News
There may be more than one lien on a home, so work with your title company to determine how many liens are on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold. And a single mortgage lien is an easy problem to solve.
What if There are Multiple Liens
If there are first and second mortgage liens, the question becomes: What’s the plan to satisfy these lien holders? The seller and the real estate agent should have a plan that is more sophisticated than crossing their fingers, Thompson says. In the best of all possible worlds, the seller will be willing to contribute to paying off the second lien, so the first lien holder gets the full amount from the sale.
If there is a third mortgage lien, reaching any deal is very iffy. Deal killers include child support liens, state tax liens and homeowners association liens. If they exist and there are no obvious solutions, walk away, Thompson says.
Aaannnd Then There’s Mortgage Insurance
Here’s one last deal killer. It’s like a snake lurking in the grass. Because a short sale generally doesn’t cover the whole amount owed or other liens, it can sometimes trigger mortgage insurance. If the property is covered by a mortgage insurance policy that doesn’t have to pay off until the home has been in foreclosure for 150 days or some similar length of time, chances are the insurer will hold up the sale because it won’t want to pay any earlier than necessary and hopes the foreclosure will just disappear. Often the mortgage insurer will simply go silent. No response = No approval.