Do Liens Stay With The House After A Short Sale?

By
Real Estate Agent with Keller Williams Realty Louisville East (502) 664-7827
https://activerain.com/droplet/7Gf

Does the buyer get stuck with the seller's debts and liens after buying a short sale?  The short answer is; No. The mortgages, liens and judgements do not stay with house.

Buyers and sometimes their Realtors get concerned that a house in foreclosure may have debts attached to it that will survive the closing of the short sale. Buyers are concerned that they will “inherit” the seller’s debt.

Here are the safeguards against that happening:

  1. Title search
  2. Negotiation with lienholders to release the liens from the property
  3. Closing attorneys confirm clear title before they administer the transfer
  4. Title insurance in case of errors in the title clearing process

IMPORTANT NOTE: I am not an attorney. I am a Realtor. This article is based on my experience as a short sale Realtor practitioner and may have legal inaccuracies. Please consult an attorney to confirm your rights and obligations.

Let’s review each one of the safeguards in more detail

Title Search

  • A professional and responsible short sale Realtor will order a title search for the property early in the short sale process.
  • A title search will uncover any liens on the property that need to be paid off before the property can transfer to the buyer.  
  • Running a title search enables the short sale Realtor ample time to negotiate the release of the liens off the property, if the lienholders are willing.

Negotiation with lienholders to release the liens from the property

  • Armed with an early title search, the short sale Realtor can contact all the lienholders. The goal is to have the lienholders release their lien off the property. There are variations to the release terms.
  • The lienholder may settle for less, forgive the difference and release the lien.
  • The lienholder may demand full payoff and release the lien.
  • The lienholder may accept a partial payment, release the lien from the property but keep the borrower obligated on some or all of the shortage in the form of promissory note that is not secured by the property being sold.
  • There are other variations, but they key point is the release of the lien off the property so it can be transferred to the NEW BUYER free of encumbrances and free of the previous owner's debts.

Closing attorneys confirm clear title before they administer the transfer

  • The short sale Realtor provides “acceptance letters” or “letters of intent” or “settlement agreements” from the lienholders to the closing attorney.
  • The closing attorney reviews all the settlement agreements and incorporates them into the HUD-1 settlement statement if relevant.
  • The attorney will also run a title search update.
  • The closing attorney will not close the transaction until every lien is identified and has a corresponding settlement or payoff document. The attorney confirms all the arrangements, after all, they are attorneys, the Realtor isn’t.
  • Sometimes a last minute lien gets filed by a creditor that the Realtor, the attorney and the seller did not know of until days or even hours before the closing. That could delay the closing until the new lien is settled.
  • The settlement amounts get paid to the lienholders prior to closing or through the HUD-1 settlement statement at closing.
  • To the best of the attorney’s knowledge, the property is transferred to the new buyer free of all encumbrances.

Title Insurance

  • Buyer’s should buy title insurance, especially in a short sale purchase.
  • In a pre-foreclosure short sale, there indeed is more likelihood the seller has other debt issues other than their mortgage. This could include but not limited to Homeowner Association dues, back property taxes, credit card judgments, business debt judgments, repossession judgments and more. All of these should be identified and resolved prior to the closing and transfer to the new owner.
  • However, this process is still a human endeavor and could be prone to errors. Title insurance is a policy with a one-time insurance premium the buyer pays to cover future claims in case something slips through the cracks during the closing process.
  • The closing attorney administers the purchase of the title insurance.

Again, please consult an attorney to confirm accuracy of the legal aspects of this topic.

All additions or dissenting opinions are welcome from anyone who chooses to comment on this blog post!

Posted by

 

 

Dave Halpern, Realtor

The Dave Halpern Real Estate Group

Keller Williams Realty Louisville East

Website David.DavidHalpernRealtor.com

(502) 664-7827

 

 

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Re-Blogged 2 times:

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Topic:
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Location:
Kentucky Oldham County
Groups:
Manage My Short Sale
Short Sale REALTORS®
Short Sales
Short Sales Specialists
The Ninety-ninth Percentile
Tags:
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Rainmaker
1,068,548
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Excellent article on this subject.  Short sales can be so tricky and constantly evolving.

Apr 04, 2011 03:09 AM #1
Rainmaker
2,191,699
Elizabeth Weintraub Sacramento Realtor Top 1%
RE/MAX Gold - Sacramento, CA
Put 40 years of experience to work for you

A little known problem we have in California is the UCC filings, which survive foreclosure. You most often find them from SMUD, which is our local utility that files them to secure financing for dual pane window purchases. Whenever I see new dual panes in a short sale, I ask the seller about financing. Half the time they are amazed to discover the loan is secured to their home. These have to be paid off by somebody.

Apr 05, 2011 05:58 AM #2
Rainmaker
526,160
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Elizabeth,

Thanks so much for reminding me of UCC filings. You are so right about the homeowner being surprised when they find out the UCC filing encumbers the property. Another reason to run title early in the process.

I ran into a handful of UCC filings over the years. I vividly remember one was for a water softener and one was for an above ground pool. The contractor arranges for the homeowner to get financed by a finance company. In each case the contractor got paid and the finance company held the note and filed the UCC.

 

Apr 05, 2011 11:49 AM #3
Rainmaker
835,443
Sheila Newton Team Anderson & Greenville SC
Berkshire Hathaway HomeServices - C. Dan Joyner - Anderson, SC
Selling the Upstate since 1989

Great post Dave.. I will have to reblog this one... We get that kind of question all the time!!

Apr 06, 2011 06:20 AM #4
Ambassador
2,288,538
MichelleCherie Carr Crowe Just Call...408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Yes it's surprising how we can forget to go over these details.

Apr 08, 2011 12:05 AM #5
Rainmaker
90,655
Goran Utvic
606 Homes LLC | Chicagoland Brokers Inc, Chicago IL 60656 - Chicago, IL
We Buy & Sell Chicago Houses Fast

Dave - Great post...this trully is a concern that buyers have and the information you provide is right on.

May 01, 2011 04:46 PM #6
Rainer
325,801
Scott Hoen
HollywoodTitleCompany.com - Carson City, NV
COO, Hollywood Title Company 714-270-9607

This is an important topic in California -- make sure your buyer gets the ALTA Homeowners policy -- at First American we call it our Eagle Policy.  The policy protects buyers for post closing issues like liens that may arise from the previous owners commitments that have not been recorded against the property at closing.  For example, the seller painted the house and didn't pay the contractor fully and a lien is attached to the property -- their is value in making sure you have the right policy and Title Insurance Company

Jul 03, 2011 05:43 AM #7
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Rainmaker
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Dave Halpern

Louisville Short Sale Expert
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