A lien is an encumbrance on a property to secure a debt the property owner owes to another person. A lien holder is the bank, finance company, credit union, other financial institution, or individual with whom you signed an agreement to sign holder stands borrow money using a particular asset. Lenders or lien holders lay claims to the property if the loan is unable to be repaid. Lien holders all lay claims to a property, but all liens are not created equal. It’s risky to buy a property without making certain that there are no liens on the property. You may end up with nothing if you purchase a property with liens that worth more than its value.
One of the most important liens every foreclosure investor should pay attention to is the tax lien. Tax sale rules may be different from state to state. In some states, foreclosure can wipe out all other liens except the property tax lien. Therefore, tax lien holders almost hold controlling interest in the property; any lien holder with a major interest in the property is likely to pay for the unpaid taxes. After the claims of the tax lien holders, the first-mortgage holder can claim a pay for the bad loan. In a foreclosure auction, the first-mortgage holder can pay any back taxes that are due to purchase the property. He can then wait for the redemption period to expire and sell the property. The lien holder who has the claim after the first-mortgage holder is the second mortgage holder. If the lender stands to lose a great deal of money, the lender may be motivated to buy the first lien and pay and back taxes to strengthen its position. The construction lien holder is in a very weak position because foreclosure wipes out their position. They are often motivated to negotiate a short sale. In short, the lien hierarchy is looked like below:
Property tax lien (strongest).
Construction loan (new windows).
Second mortgage (weakest).
The lien hierarchy is determined primarily by the dates on which loans are recorded against a property. But don’t confuse the date the mortgage was taken out with the date it was recorded. If another mortgage is taken out and recorded before the first mortgage is recorded. The first mortgage loses its priority position. There are also other conditions and exceptions in the foreclosure. Before you place any offer, consult a real estate attorney who has solid experiences in titles and mortgages.