A lien is a legal claim on someone’s property that secures a debt. The owner keeps the property and can use it, but if the debt is not paid, the lien holder can have the property sold to recover what is owed.
Debt, lien and ownership
These are separate things, and a seller-financed sale shows the difference clearly. The debt is the money owed, set out in the promissory note. The lien is the claim on the property that backs the debt, created by the mortgage or deed of trust. Ownership stays with the borrower throughout, so a lien holder has no right to use the property or live in it.
A lien follows the property as well as the person. If the owner sells, the lien has to be paid off from the sale before the new owner can take clear title, which is what gives it force. When the debt is paid in full, the lien holder signs a release and the lien comes off the public record.
Voluntary and involuntary liens
| Type | How it arises | Examples |
|---|---|---|
| Voluntary | The owner agrees to it in exchange for credit | A mortgage, a deed of trust, a seller-financed note secured by the property |
| Involuntary | Placed on the property by law or by a court, without the owner’s agreement | Unpaid property taxes, a court judgment, a contractor’s unpaid bill, unpaid association dues |
If you sold a property and carried the financing, yours is a voluntary lien. The involuntary kind matters to you because one can land on the same property later and compete with your claim.
Lien position: who gets paid first
A property can carry several liens at once. They are ranked, and the ranking is called lien position or priority. If the property is sold through foreclosure, the proceeds pay the first lien in full before the second receives anything, and so on down the line.
A first lien sits at the front, the safest place for a lender to be. A second lien, also called a junior lien, is paid only from what is left after the first is satisfied. As an example with round figures, take a property that sells at foreclosure for $150,000 with a first lien of $120,000 and a second of $50,000. The first is paid in full, and the second receives the remaining $30,000 and is $20,000 short. Had the property sold for $120,000 or less, the second would have received nothing. The costs of the sale are left out of this example, and they would leave the second lien with less still.
Position generally follows the order in which liens were recorded in the county records, which is why recording a mortgage promptly matters. There are exceptions under state law, and an attorney or title company can confirm the order on a specific property.
Why lien position drives a note’s price
When you sell a note, the buyer is pricing risk, and lien position decides what that buyer could recover if the payer stopped paying. A first lien on a property with plenty of equity gives a clear route to getting the money back, so more buyers want it and they pay more for it. A second lien depends on the first being kept current and on there being value left over. Fewer buyers take those, and the price is lower.
The tie between lien position and note value is that direct, so find out whether you hold a first-lien note before you ask anyone for an offer.
Liens that can get ahead of yours
A first lien can still have something move in front of it. Property tax liens are the main exception to the recording order, because they can rank ahead of a mortgage regardless of date. If your payer stops paying the county, the unpaid tax builds up and, left alone, may put your whole position at risk. For that reason a note holder should check each year that the taxes have been paid and that the property is insured. If you have found unpaid taxes, see what to do when your borrower did not pay the property taxes.
How to find the liens on a property
Liens on real estate are public. You can search the county land records under the owner’s name, or pay a title company for a report listing every recorded lien and its order. A note buyer will order that report before funding, so it helps to know in advance what it will show, and to have it beside you when you ask what your note would sell for.
If you hold a note, the search should answer the following:
- Is your lien recorded?
- What position is it in?
- Are the property taxes current?
The answers go a long way toward explaining any offer you receive. A term in the title report that you do not recognize can be looked up in the note basics guide, and an entry you did not expect to see is a question for the title company that produced it.
Related questions
Does a lien mean the lender owns the property?
No. The borrower owns the property and can live in it, rent it or sell it. The lien gives the lender a claim that must be cleared, normally by paying off the debt, before clear title can pass.
How is a lien removed?
When the debt is paid, the lien holder signs a release, sometimes called a satisfaction or reconveyance, and it is recorded in the county records. Until that is recorded the lien still shows on a title search.
Can I sell a note that is in second lien position?
Sometimes. Fewer buyers purchase second liens and they pay less for them, because the first lien is paid ahead of yours. Whether yours can be sold depends on the equity in the property and the payer's record.