Unpaid liens can ruin a short sale

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Dear Real Estate Adviser,
I’m thinking of buying a short-sale home. If the delinquent owner had any mechanic’s liens, am I now responsible for them? If I make a short-sale purchase, isn’t the title usually “free and clear”?
— Clark

Dear Clark,
Unless you’ve already bought the house, you aren’t yet responsible for a mechanic’s lien, which is a legal claim placed on a home to settle unpaid or partially paid contractor work. The owner is still responsible for the debt and any other such obligations that can become real deal breakers in a short sale if the financially strapped seller can’t satisfy them or the lender is unwilling to intervene.

Once you close on the short sale, you’d likely be held accountable for any unsettled liens. These could include the aforementioned contractor liens, property-tax liens, IRS liens, homeowners’ association “special assessment” liens or even a surprise second mortgage. In a perfect world, where every seller is above board and all deed recordings are thorough and accurate, there will be no liens left to settle after a sale. But I’ve seen far too many examples of new owners getting socked for old liens and sometimes suffering mightily.

So, no, a title from a short sale is not always inherently “free and clear.” While liens are typically wiped out in a foreclosure purchase, that’s not the case 100 percent of the time in short-sale homes. These deals are far more likely to suffer unsatisfied obligations against them than conventionally marketed homes.

Hence, before going too far with a short-sale purchase, serious buyers should get a preliminary title search performed to determine the extent of outstanding legal obligations. Most good real estate agents or attorneys will know a title company that can perform one for a fee.

If you discover one or more and choose to deal with lien holders directly to speed the transaction, know that you can always try to negotiate with them to release their liens for less than face value. Of course, your negotiating leverage ends with the closing!

If you do buy that short-sale home, you need to buy an owner’s title insurance policy instead of a lender’s title insurance policy. One of the two is typically required by the lender. The owner’s version protects you against losses due to title defects that weren’t disclosed by the buyer at or before closing. The lender’s policy simply protects the lender against title defects.

As an aside, also know that even with expert representation, short sales tend to suffer high failure rates and sometimes simply can’t close in time to prevent foreclosure. And as you probably suspect, a persistent lien holder can play a key role in delaying or jeopardizing the closing of a short sale. At the very least, you need an agent who is highly practiced in short sales on your side, if not a real estate attorney.

Here’s hoping you get a great deal. But don’t be “short” sighted.

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