Liens are legal claims on property that are often placed by creditors or government agencies to secure property taxes, contractor fees and other unpaid debts. Common types include tax, judgment, mechanic’s and residential liens. A lien sale settles the debt and can offer a chance to buy real estate and other assets at a lower price. This process can be useful for property owners or those looking to invest in real estate.

A financial advisor can help you assess how a lien sale could affect your real estate portfolio.

What Is a Lien Sale? 

Liens are legal claims on property for unpaid debts. These may include overdue property taxes or contractor fees. When the debt remains unpaid, the property may be sold through a lien sale to cover the amount owed.

Before a property is sold, the lien must be paid off or settled. Creditors and property owners can sell the property to recover the debt. Buyers in lien sales may get properties at a lower price.

Lien sales help creditors and property owners recover debts while also offering benefits to buyers. Buyers may find opportunities to purchase properties at lower prices, making lien sales a valuable option in the real estate market.

Lien sales follow legal rules, but regulations vary by location. If you are involved in a sale, make sure you understand the local laws.

How a Lien Sale Works

A lien sale helps recover unpaid debts through a structured process. For example, if a property owner fails to pay property taxes, a tax lien is placed on the home. The local government, acting as the creditor, then starts a regulated lien sale to collect the debt.

This begins with a grace period, during which the borrower can repay the debt and remove the lien. If the debt remains unresolved, the government then publicizes the lien sale, usually through auctions, affording potential buyers the opportunity to bid on the lien. 

In this process, the highest bidder does not immediately own the property. Instead, they gain control of the lien. And, if the debt remains unpaid, they may later claim ownership.

Lien sales, like tax liens, can benefit both creditors and buyers. However, buyers should research the property title and understand local lien sale rules.

Talking to a financial advisor can help you understand your options and the types of lien sales available.

Types of Lien Sales

Knowing the types of liens that could lead to sales can help position you as a buyer. Here are three common types that you may consider:

• Mechanic’s liens: These are placed on properties due to unpaid contractor or construction debts, and are recorded with the county. Buyers interested in these sales can check the county recorder’s office or online databases for properties with mechanic’s liens.
• Tax liens: This sale can occur when a property owner does not pay property taxes. Local governments place tax liens to recover back taxes and may sell them at auctions. You can find upcoming lien sales by checking the county’s website or contact the tax office.
• Judgment liens: These liens come from court rulings against property owners for unpaid debts and are recorded in the county where the property is located. Buyers can check public records or court databases to find properties with judgment liens.

Example of a Lien Sale

Let’s assume that a homeowner falls behind on property tax payments due to financial hardship and the local government places a tax lien on the property. The owner gets notified of the overdue balance and is given a deadline to pay the debt.

If the homeowner is unable to settle the amount, the local government will move forward with a lien sale once the deadline passes.

At a public auction, investors bid on the tax lien with the goal of either collecting the unpaid taxes with interest or, if the debt remains unpaid, gain ownership of the property. The highest bidder wins the lien and must wait for the homeowner to either repay the debt or for the redemption period to expire.

The funds from the lien sale are used to cover the unpaid taxes and any additional fees. If the homeowner repays the debt within the allowed period, the investor is reimbursed with interest. However, if the homeowner does not pay, the investor may have the right to claim ownership of the property.

How to Find Lien Sales

Buyers can find real estate investment opportunities through online government databases or auction websites, where properties with liens are listed.

Online resources can also provide a good starting point for checking the property’s title and lien status.

You can also visit local government offices, such as the county clerk or tax assessor’s office, for more information. These offices keep records of properties scheduled for lien sales, beyond what is typically available online.

Finally, real estate investment groups and forums can also be useful. Networking with other investors can help you learn about upcoming lien sales, find deals and gain expertise.

Bottom Line

A lien sale can benefit both property owners and buyers by determining how a property is sold. Understanding the types of liens and real-world examples can help when considering investments. However, knowing how the process works is essential to avoid common mistakes. A financial advisor can also provide guidance and help you create a long-term investment plan.

Investment Planning Tips

• A financial advisor can help you identify real estate investment opportunities and manage risk for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.

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