Priorities of liens recorded against a property: First in Time, First in Right
As you may imagine, and as you will see on many title reports
, a property can have multiple liens against it. How do you decipher this information, and what does it mean for you as an investor? Understanding title reports is complex, but there are some general rules of thumb you need to understand about liens and their recording order. The first is a rule called “first in time, first in right.” It establishes the priorities of liens recorded against a property. This rule states who gets paid, and in what order, in the event of a foreclosure or liquidation
. In layman’s terms, this means whichever lien was recorded first on the property title is in first position to be paid in the event of a default or sale. In the event of a foreclosure or even just a regular sale
, the priority of a lien matters. After a sale, the holder of the lien with the highest priority is paid first. Only after that party is made whole does the holder of the next highest priority lien receive any money from the sale. This continues down the list of liens until they are all paid – or until there is no money left. If there isn’t enough money for all the lien holders to be paid, the holders of the lower (subordinate) liens simply don’t get any money at all. Liens that were recorded before others have priority. This is what denotes a first lien, second lien, etc. This is very important to understand, especially when buying notes or real estate. Depending on your business model, you will want to know exactly where your lien fits into the equation, as well as any other liens that may be damaging to your position.
When you see any lien on a title report, ask yourself three questions:
1. What type of lien is it? Is it a mortgage lien, tax lien or something else?
2. What position is it in? Liens recorded first have priority over other liens. This means that the very first lien (assuming it’s still valid and unpaid) will be paid first in the event of a sale. Knowing the position of your lien on the title report is essential.
3. What date was it recorded?
Again, this goes back to determining your lien position. If you think you are buying a first lien, but see on the title report that it was recorded after another lien, then you really are buying a second lien. These details matter.
In addition to mortgage liens, there are many other liens (or claims) that are legally binding against a property. Some of these include:
· Real estate tax liens
· IRS liens
· HOA liens
· Mechanics liens
· Municipal liens
· Code violations
A lien of any kind against a property will need to be satisfied or paid off before transfer of ownership or refinance can take place. The most typical transfer of ownership involves selling the property in some manner.