For many buyers, the home shopping experience involves gazing wistfully at hardwood floors, kitchen countertops, new appliances, and the sunny views from the windows over the garden. As the purchase decision gets closer, the focus turns to the AC efficiency and the state of the roofing, electric outlets, vents, and ducts. Even then, an unknown lien on the title might be the furthest thing from a buyer’s mind.
Liens represent debts that must be resolved before the home can be sold. A mortgage lien, for example, represents a buyer’s obligation to repay the lender.
Before the title can be conveyed to a new owner, a title search will look back over the chain of title to find easements, covenants and restrictions in the records. If a preliminary title report comes back clean, it means nothing substantial was unearthed in the records. Typically, then, the buyer can then access financing, and the parties may proceed with the deal.
But what about unrecorded liens? No one likes surprises that could delay closing. Potentially even more problematic are liens that escape the title company’s attention entirely, only to be discovered after the new owner has lived in the home for some time.
To avert these problems, it helps to know the basics of unrecorded liens.
A Municipal Lien Search Can Find Unrecorded Liens.
Your realtor will likely want a municipal lien search done as soon as possible. When your home inspection is being ordered, check on the municipal lien search order, and be sure it will include a search for open and expired permits. Responsibility for the cost of searches can be assigned in the contract between the buyer and seller.
It’s worth emphasizing that a buyer assumes responsibility for the title when acquiring a home to live in. Buyers should find out what permitted improvements have been made to the home over the years, and what debts and requirements a local government agency could have placed on the property.
Municipal searches can vary in their level of diligence. A thorough search should encompass:
- Tax liens for outstanding property tax bills. Cities and townships can file liens for back taxes, tacking on interest and additional charges.
- Unpaid utility charges. Some counties and cities put liens on homes for utility bills that homeowners leave unpaid.
- Unpaid special assessments imposed by homeowners’ associations (HOAs). These are bills for improvements that weren’t covered in regular monthly condo fees.
- Unpaid special assessments by municipalities. These are billed to homeowners for enhancements such road works, signs and lights, and water and sewer systems.
- Open permits or code violations. If you plan to renovate your new home, and need a permit, the last thing you’ll want to find is evidence that a prior owner’s renovation was not inspected and closed out. Be sure the prior owner complied with local safety standards. Ask for a search!
Remember that the home’s asking price is negotiable, on the basis of renovations already done, and the expenses of any repairs and replacements still needed. With lien and permit searches, buyers can look under the hood to examine permitted improvements and local service bills. This step provides insights to the condition of the home, repairs likely to be needed in the future, and unpaid claims.
Protect Your Ownership — and Your Heirs. Be Sure Your Payoffs Get Recorded.
When you pay off a debt associated with a lien — for example, when you pay off your mortgage entirely or when you refinance — you’ll receive a payoff statement. Next, keep a close watch on the all-important recording step. Allow a brief period after your mortgage payoff for the company to process the lien release, then call the loan servicer to confirm that the lien release is recorded. Land records should also show the lien release.
In some cases, it’s the borrower who has to record the mortgage release. Don’t miss the memo! Whenever you get a payoff verification letter from a mortgage company, follow up. If the lender doesn’t record, take this step yourself.
Same goes for home equity lines of credit. You might have paid yours down to a zero balance, or never used your credit line at all. It’s still secured by the home. Close out your line of credit and request a release. And of course, remember to record the release with your county recorder’s office.
Pro tip: Watch for the MIA.Unrecorded releases are common enough that in some states underwriters rely on mutual indemnity agreements (MIAs) so they can issue clear titles, letting sales or refinancing go through. No MIA can cover every potential cloud on a title — nor do MIAs actually release existing liens. Where an MIA is used, follow up with your title agent after closing to get any lingering defects resolved. Even if there’s a payoff letter, even if it’s patently obvious that a debt is paid in full, and even if a sale goes through without a hitch, an unrecorded release is still a cloud on the title.
Owed and Paid-Off Debts: Both Can Fall Through the Administrative Cracks.
Both liens and payoffs can slip through the cracks and go unrecorded. In multi-unit properties, liens may be attached by various contractors, with partial releases recorded as each unit is purchased. Some liens can easily be overlooked.
Mortgage liens can also cause trouble, especially as a number of lenders went bankrupt in and around 2008. Creditors may have merged with other companies; debts may have been sold.
If the homeowner holds an owner’s title insurance policy, this can provide the level of assurance that enables a transaction to go through. The policy indicates that expert backup is available — an insurance company working on having releases recorded. Otherwise, the discovery of an old, unrecorded lien or release can start a practically impossible paper chase.
Note: The mortgage lender’s policy doesn’t give the buyer any contractual protection. Only the beneficiary named on the policy has coverage for later-discovered title defects.
Limit Your Risk. Be an Informed Title Insurance Policy Holder.
With an homeowner’s standard policy (here’s an example), your title insurance should cover you for — among many other issues — these unrecorded encumbrances:
- An ineffective or disputed release of a prior owner’s lien.
- A faulty indexing of a deed that was recorded, rendering the release impossible to find.
- Any undisclosed encumbrance, as well as the unrecorded encumbrances.
- Tax releases that mistakenly credited payments to the wrong person.
- Formerly released yet reinstated tax and assessment liens.
- Unrecorded special assessments.
Additionally, policies may be written with extended coverage against:
- Contractors’ unrecorded mechanics’ liens.
- Unrecorded estate or inheritance tax liens.
- Previous owners’ noncompliance with zoning ordinances, covenants and restrictions running with the home’s title.
Speak to a title insurer to learn what the company’s policies cover through the life of your homeownership. At the same time, consider having a real estate lawyer examine the title search report and answer any questions you have about the inspection, the title searches, and insurance.
We hope our readers will never be surprised by undisclosed or unrecorded liens. But it’s good to know buyers can take affirmative steps to cover their assets.
Photo credit: Ben White, via Unsplash.