Short sales, foreclosures and other purchases of real estate can always lead to problems. One risk in buying a home in foreclosure or from a seller in a short sale is that the seller or the bank owner had work done on the property and the contractor never gets paid. The contractor, in this case a painter, then files a contractor lien on the home and the subsequent buyer may get stuck with the bill.

Q: I purchased a house that was a short sale at the end of August and have since received a claim of lien letter from a painter. The builder must not have paid the painter. Am I responsible for the debt owe by the builder?

A: You may be responsible for the lien because it wasn't settled at the closing and paid out of the closing proceeds. This is one of the problems with doing a short sale as opposed to a foreclosure where all liens are usually wiped out.

In many states, buyers purchase title insurance to guard against liens and other title issues that may surface after the closing. The title company in turn protects itself by obtaining a statement from the seller of the home representing that all work performed on the home during the previous months has been paid in full. Once it has the statement, the title company can then issues an owner’s title insurance policy to the buyer covering the buyer for any liens that could pop up once the sale has gone through.

Did you buy an owner’s title insurance policy for the property or did you just buy a lender’s title insurance policy? And if you did obtain title insurance, does the title insurance policy include coverage over mechanics liens?

If so the title company should defend you from the lien or pay the lien holder off to remove it from your title.

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