Real estate title issues and property liens are some of the biggest hurdles to closing real estate deals. If you are planning to invest in real estate, make sure you understand property titles and liens. Here are some common title issues.
Common Title Issues That Can Affect a Real Estate Investment
- Recording errors – Clerical errors, or filing errors at your county’s records office, could delay a pending real estate transaction if not resolved quickly.
- Heirship – There are times when a property owner dies and living family members can’t be found. These heirs often show up after the property has been sold, presenting an ownership difficulty for the property’s buyer. At other times, a missing will may materialize after the property has been purchased. If that happens, a living heir could challenge ownership.
- Forged deeds – A forged property deed could challenge your right to ownership.
- Illegally filed deeds – If a minor, an undocumented immigrant, or a misnamed person files a deed, that could affect the legality the current or previous titles.
- Boundary disputes – Differing surveys may conflict causing a neighbor to challenge your right to some of your property.
Other title issues, such as a lien, could also affect an investment. A lien is a claim against property for unpaid debt. Liens on real estate are often placed by financing companies and other debtors because the property was used as collateral for an unpaid loan.
Types of Property Liens That Could Affect a Real Estate Investment
When a property owner borrows money to purchase real estate, he enters into a voluntary lien called a mortgage. The lending institution has first rights to that property if the borrower defaults on the loan.
Another type of property lien is an involuntary lien. If you purchase real estate with an involuntary lien placed on it, you could run into legal difficulties. Here are some common types of involuntary property liens:
- Contractor liens – A contractor, such as a construction company, who worked on a piece of property but wasn’t paid may place a lien on the property itself demanding payment for services rendered.
- Tax liens – Unpaid property taxes can result in a big headache for a property owner. If there are unpaid property taxes on real estate you have purchased, you could be liable for those taxes. The IRS may also place a lien on real estate to recover unpaid taxes owed to the Federal government. Typically, the IRS will seek to garnish a taxpayer’s wage income. If the taxpayer has an unstable work history and this is not possible, the IRS may go after the taxpayer’s property.
- Judgments – A judgment is a court-mandated action that requires a property owner to make a payment to an individual or institution before selling a property. These could result from unpaid alimony or child support, a lawsuit decided in favor of a debtor, or any situation where a presiding judge felt justice would best be served by placing such a lien on the property.
Resolving Title Issues and Property Liens
Sometimes, property liens are passed onto the buyer of the property. At other times, a lien may delay or halt the sale of the real estate until the money owed to the lienholder is paid. In some cases, the buyer and seller agree to pay the lienholder from the proceeds of the transaction. In this case the title company will ensure all parties receive the appropriate monetary compensation. Often, however, title issues and property liens take a long time to resolve eating away at potential returns on investment. For these reasons, real estate investors should perform a thorough title research before committing to any investment. In the case of equity crowdfunding, you should ensure that the investment underwriter conduct a thorough title research on your behalf.
