Introduction

In real estate investing, surprises are the last thing you want—especially when they come in the form of hidden liens or lawsuits against a property. Whether you're pursuing seller financing, owner financing, or looking to take over mortgage payments, discovering unexpected liens can derail a deal and cost you time and money. The good news is that by asking the right questions upfront, you can uncover these potential pitfalls early on.

In this post, we'll discuss the crucial question you must ask every seller to identify any liens on a property, how to interpret their answers, and why this step is vital for successful real estate investing.

Why Knowing About Liens Is Critical

A lien is a legal claim or right against a property. Liens are typically used as collateral to satisfy a debt, and they can come from various sources:

• Mortgage Liens: The most common type, where the property serves as collateral for a home loan.
• Tax Liens: Imposed by the government for unpaid taxes.
• Child Support Liens: Arise when an individual fails to pay court-ordered child support.
• IRS Liens: Federal tax liens due to unpaid federal taxes.
• Mechanic's Liens: Placed by contractors or suppliers who haven't been paid for work or materials.

Failing to identify these liens can lead to:

• Deal Cancellation: The discovery of liens during the closing process can halt a deal.
• Financial Loss: If you acquire a property with liens, you may become responsible for satisfying those debts.
• Legal Issues: Some liens can lead to foreclosure or legal action against the property.

The Key Question to Ask Sellers

When speaking with a seller, whether over the phone or in person, make it a priority to ask:

"Are there any lawsuits or liens against the property?"

This open-ended question encourages the seller to disclose any existing issues that could affect the property's title.

Digging Deeper

Sellers might not always provide complete information initially. Here's how to delve further:

1. Mortgage Liens

   • Question: "Do you currently have a mortgage on the property?"
   • Why It Matters: Knowing the mortgage balance helps in structuring deals like subject-to investing or wraparound mortgages.

2. Tax Liens

   • Question: "Are there any unpaid property taxes or tax liens I should be aware of?"
   • Why It Matters: Unpaid taxes can become your responsibility after purchase.

3. Child Support or IRS Liens

   • Question: "Do you have any outstanding debts like child support or IRS obligations that might result in liens?"
   • Why It Matters: These liens can complicate the title transfer and delay closing.

4. Other Liens

   • Question: "Have any contractors or service providers filed mechanic's liens against the property?"
   • Why It Matters: Indicates unpaid work that could become your financial burden.

Interpreting Seller Responses

• Full Disclosure: If the seller openly discusses existing liens, it's a sign they're motivated and willing to work towards a solution.
• Hesitation or Evasion: If the seller avoids the question or provides vague answers, proceed with caution and ensure thorough due diligence.
• Denial of Liens: Even if the seller claims there are no liens, always verify through a professional title search.

The Importance of Conducting a Title Search

While asking the seller is a critical first step, it's not foolproof. A professional title search is essential to:

• Verify Seller Claims: Ensure that all disclosed information is accurate.
• Uncover Hidden Liens: Identify any undisclosed issues that could affect the transaction.
• Protect Your Investment: Title insurance can safeguard you against future claims.

How Liens Affect Creative Financing Strategies

1. Seller Financing / Owner Financing

   • Impact: Existing liens can complicate or even prevent seller financing arrangements.
   • Solution: Structure the deal to address liens upfront, possibly by adjusting the purchase price or terms.

2. Subject-To Investing (SubTo)

   • Impact: Taking over mortgage payments is risky if there are additional liens.
   • Solution: Ensure all liens are disclosed and accounted for before proceeding.

3. Wraparound Mortgages

   • Impact: Existing liens can interfere with the new mortgage wrapping around the old one.
   • Solution: Negotiate with the seller to resolve liens before closing.

4. Rent-to-Own Agreements

   • Impact: Liens can affect your ability to exercise the option to purchase later.
   • Solution: Include clauses in the agreement that address the resolution of liens.

Protecting Yourself as an Investor

• Use a Comprehensive Script: Having a set of prepared questions ensures you don't miss critical information. My Ninja Phone Script is a valuable resource that covers all essential queries.
• Document Everything: Keep detailed notes of all communications with the seller.
• Consult Professionals: Work with real estate attorneys and title companies to conduct thorough due diligence.
• Stay Informed: Understanding the types of liens and their implications helps you navigate potential issues effectively.

Case Study: The Costly Oversight

Imagine you're an investor who finds a promising property. The seller seems eager, and you proceed without asking about liens. After investing time and resources into the deal, a title search reveals a substantial IRS lien. Not only does this delay the closing, but it also adds unexpected costs that can kill your profit margin.

By simply asking the key question upfront, you could have identified this issue early and made an informed decision about whether to proceed.

Conclusion

In real estate investing, knowledge is power. Asking the seller if there are any lawsuits or liens against the property is a simple yet crucial step in protecting your investment. It helps you gauge seller motivation, understand potential obstacles, and structure deals that are beneficial for both parties.

Take Action Now

Don't leave your next deal to chance. Equip yourself with the tools and knowledge to succeed.

• Get Your FREE Ninja Phone Script: Visit MyRealEstateDojo.com to download the script that will transform your seller conversations.
• Download "Zero to Deal": Grab my latest book at TheNewFlip.com and learn how to close your first seller financing deal in just 4 weeks—with zero money! Plus, for every book sold, I'll feed a homeless person in your name.
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