How a Lien Can Affect the Sale of Your House
A lien is a cloud on title. So if you’re purchasing or selling a house on a warranty deed (clean title), then the lien will need to be cleared in order to close.
What is a Lien?
Definition: a right to keep possession of property belonging to another person until a debt owed by that person is discharged
A mechanic’s lien and a judgement lien are two common forms. A mechanic’s lien can be filed by a contractor performing work on a home or car. If the labor is unpaid by the debtor a mechanic’s lien may be granted giving the laborer rights to the property. In a judgement lien a creditor may also file a claim for property of a specified value to cover the unpaid costs incurred from an agreement for goods or supplies.
Our experience with Burton, Oak Park, MI
We recently ran into trouble with a lien on a property which we owned. We purchased and renovated a house and were now about to sell it. Just days before we were all set to close with the new buyer, a lien popped up that was filed against the previous owner by a person we’ve never heard of. Since this lien was a cloud on our title, we were forced to delay our closing with the new buyer until the matter was sorted. The lien had nothing to do with us, but since it was recorded after we purchased the property it was our responsibility.
Before we purchased the property the prior owner filed an insurance claim on the house. Apparently he had some work done and an owed an insurance adjuster money and didn’t pay in full. So the insurance adjuster filed a lien against the house thinking that it was still owned by the prior owner. The lien was filed 3 weeks after our new deed was recorded, but we were still on the hook.
We contacted the Oakland County register of deeds to find out how he was able to file a lien even though we bought the house 3 weeks prior. To our surprise, anyone can file a lien. The register of deeds doesn’t have a process to check if a lien has any legal standing. As long as the document is in proper format and is notarized correctly they will record it. They are simply just a record keeper. Any disputes towards a lien has to go through the court system.
When we bought this house the sellers were in need of a quick sale. The house needed work and they weren’t in the position to list the house on market. We loved the house and saw that it had great potential, so we purchased and closed on it 2 days after we saw it. Proud that we were able to help the sellers out as quickly as we did, we were now excited to fix the house up and provide the next homeowner with a beautiful home.
It didn’t take us long to find a buyer once the house was on market. The buyer that we had an agreement with was having a tough time buying a house. She almost purchased a house before ours but it fell through on appraisals so she had to start her search over from the beginning. Needless to say, that after that ordeal she was anxious to close on our house.
When the lien popped up we didn’t really think much of it. We had title insurance when we purchased the house which is supposed to protect us against such situations. Plus, how could a lien that had nothing to do with us have any standing against the property? Well, since the lien was filed after our closing the title policy we had did not cover it. So what’s next? Can the title company issue a new policy to cover the lien, since it’s clearly a false claim? Maybe, but that is left up to the underwriters to decide.
In order to insure a policy in this type of situation takes a lot of leg work. The title company’s claims department issues a lawyer to look into it. That lawyer figures out if the lien has any legal standing, then types up a report and sends it off to her manager. Her manager reviews and approves it, then sends it off to the underwriters. The underwriters then decide if they can issue a policy. The process can take weeks to resolve. In our case, since we were about to close, the process seems like it is taking an eternity.
With all this uncertainty, the people stuck with the mess are the people who had nothing to do with it. The previous owner is clean because he sold the house before the lien was placed. And the person who placed the lien is holding the property hostage until he gets paid. Meanwhile, we, as the current owners, are caught in middle. We don’t want to pay the lien, but we want to close on the sale with the new buyer. The new buyer is left not knowing whether or not she’s going to be able to move into her new house. Not to mention that her family was visiting from out of town to see her new home, but now she doesn’t have a one to show them until the situation gets resolved.
Getting to Close
The title company we closed with when we bought the house had there claims department on it. Their lawyers sent letters out to the lien placer stating that he had no legal standing and to release the lien immediately. They also sent a letter to the prior owners telling them to resolve the issue immediately. After only a few days time, we received a letter from the lawyers handling the claim. The letter stated that since the lien was filed after they issued the title policy, they were not on the hook to resolve the matter. Basically, they did their research and put necessary paperwork in place in order to cover any liabilities towards them.
Now that the claims department finished their legwork, we finally had approval from the underwriters to close. Great news, but… we had to close in escrow. They were not willing to issue a new policy around the lien. So, we had to keep 1.5x the lien amount in escrow until the lien was cleared. Now it was up to us to file a suit against the lien placer in order to get him to release the lien so we can collect the rest of our funds from escrow. The title company doesn’t hold funds in escrow forever. We have 90 days after we close to get the lien released or the title company pays off the lien with the escrow funds. Whatever is left over from paying off the lien they will send back to us.
Happy Ending After All
To our surprise the person who placed the lien had it released. It seemed like the letter he received from the lawyer was incentive enough to release the lien. So in the end, we didn’t need to close in escrow or pay the lien ourselves. It took us an extra 3 weeks to finally close after the whole ordeal, but in the end the new buyer was delighted she was finally able to move into her new home.
Order title work immediately once house is up for sale. This will help prevent surprise issues with title. It will also give you time to sort out situations without delaying closings.
Before purchasing a house ask the sellers if there have been any recent insurance claims on the property
Make sure the title company issuing the title policy provides “Gap Coverage”. This covers the period between day of closing and the day the new deed is recorded. This will prevent liability from any liens placed between that time period.