When you think of homeownership, and all the bills that come along with it, you likely think of things like mortgage payments, insurance premiums, or property taxes. It’s not uncommon for homeowners to fall behind on their bills, especially during tough times.
Since COVID, New Yorkers have accumulated $1 billion worth of unpaid water bills, according to recent news. At a City Council budget hearing, the city officials have been promoting a debt forgiveness program to make it easier for 100,000 building owners to get back on track with their payments, and to avoid a standstill in the operations of the New York City Department of Environmental Protection. “Customers must understand that there are consequence to not paying for their water,” said Rohit Aggarwala, the agency’s Commissioner.
What is the potential consequence of not paying your water bills? Today, we will discuss an important concept in real estate transactions: liens. If left unchecked, they can cause unexpected trouble in your real estate transactions.
What is a lien and why it matters to property owners?
A lien is a legal claim against personal property by a lender to satisfy a debt. A creditor or a legal judgment could establish a lien, which serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the lien gives the creditor the ability to enforce payment by forcing a sale of the property. There are two types of lien: voluntary lien, such as a mortgage lien on a house, or involuntary lien, such as tax liens on a property for unpaid bills.
Understanding the process of how unpaid utility bills become a lien
Unpaid bills, regardless of the amount, if still unpaid after a certain amount of time, are referred to the local government jurisdiction for further collection efforts. Oftentimes, this includes filing a lien on a property which involves recording it at the county recorder’s office. Once recorded, liens become public record, and this makes them harder to ignore or dispute.
How a lien affects the home selling process
When a lien is placed on a property, it creates a cloud on the title. This means that the property owner cannot sell the property until the lien is satisfied and released from the title. Any prospective buyer or lender will require a clear title before proceeding with a sale or financing.
A critical role played by title insurance
This is where title insurance comes into play.
As a homebuyer, you can protect yourself from the unexpected trouble of a lien by obtaining title insurance, which protects homebuyers from potential financial loss due to title defects that may not be immediately apparent.
Learn more about title insurance in our first blog: What is title insurance? A 101 guide for realtors, homebuyers and lenders on Title Insurance
Different types of liens
In addition to utility bills, other outstanding payments can become a lien on the property’s title:
- Mortgage liens: This is the most common type of lien and is placed on a property to secure a mortgage loan.
- Tax lien: This type of lien is placed on a property by a government agency when the owner fails to pay property taxes.
- Judgment lien: This type of lien is placed on a property when a court orders a person or business to pay a debt.
- Mechanic’s lien: This type of lien is placed on a property by a contractor or supplier who has provided labor or materials for improvements to the property but has not been paid.
How to remove a lien from my property?
Once the lien has been identified as paid off, you can obtain a lien release from the lien holder. This is a legal document that acknowledges that the debt or obligation has been satisfied and that the lien is no longer valid.
The lien release should then be recorded with the appropriate government office, such as the county recorder’s office, to ensure that the lien is removed from the property’s title.
To verify that the lien has been cleared, you can obtain a copy of the updated title report or title insurance policy to ensure that the property is clear of any outstanding liens.
Key takeaways from this blog: homeownership does come with various financial responsibilities. Don’t ignore the bills!