What is a Lien on Property?
A lien is a legal claim or encumbrance on a property that serves as security for a debt or obligation. When a lien is placed on a property, the lienholder has a right to be paid from the proceeds if the property is sold. Liens must be satisfied (paid off) before a property can transfer with clear title. The title company identifies all liens during the title search and ensures they're resolved at or before closing.
For real estate investors and wholesalers, liens are both a deal-making opportunity and a potential deal-killer. Properties with multiple liens may indicate a motivated seller under financial pressure, but the total lien amount reduces the seller's available equity and may make a profitable wholesale transaction impossible if the liens exceed the property's value.
Types of liens
Voluntary liens
- Mortgage lien: The most common lien. When you take out a mortgage, the lender places a lien on the property. If you default, they can foreclose. First mortgages have priority over most other liens.
- Home equity lien (HELOC): A second lien against the property for a home equity line of credit. Subordinate to the first mortgage.
Involuntary liens
- Property tax lien: Placed by the county when property taxes go unpaid. Tax liens typically take priority over all other liens, including mortgages.
- Mechanic's lien: Filed by contractors, subcontractors, or material suppliers who performed work on the property but weren't paid. Common on renovation projects.
- Judgment lien: Placed when a court awards a money judgment against the property owner. The judgment attaches to all real property owned by the debtor in that county.
- IRS/federal tax lien: Filed when the property owner owes federal taxes. Attaches to all property owned by the taxpayer.
- HOA lien: Filed by a homeowners association for unpaid dues or assessments.
- Code violation lien: Some municipalities place liens for unpaid code violation fines or remediation costs.
Lien priority
When a property is sold, liens are paid in order of priority. If there isn't enough money to pay all liens, lower-priority lienholders may not get paid. The general priority order is:
- Property tax liens (almost always first priority)
- First mortgage
- Second mortgage / HELOC
- Mechanic's liens (priority date varies by state)
- Judgment liens (in order of recording date)
- HOA liens (priority varies by state)
How liens affect wholesale deals
Every lien on a property reduces the seller's net proceeds and therefore the room for a wholesale spread. When analyzing a deal, add up all known liens and subtract from the property value. The remaining equity is the maximum room for the deal. If total liens exceed the property value, the property is "underwater" and a traditional wholesale deal won't work without lien negotiation or a short sale.
The title company will identify all liens during the title search. However, some liens may not be discoverable until later in the process. Always budget for the possibility of unexpected liens and communicate early with the title company about any potential issues.