Hey, the deal looks great. You can take the home subject to the existing financing and it has tens of thousands in equity. You get the deed and call your title company with the details to do a title search and it happens; the owner has a $25,000 lien from a defaulted credit card and a medical lien for another $10,000. Suddenly a home that you could sell for a $50k profit is a dog that is hardly worth the effort; or is it.
What if I told you that you can negotiate these liens and judgments as well, and many times save a bad deal or make a good deal even better?
Liens and Judgments can make or break a deal, but the first thing you as the investor needs to know is how to deal with them. First we should go over a few definitions. A lien and a judgment are two completely different animals, and are confused regularly by even the most seasoned investors.
In law, a charge or encumbrance on property for the satisfaction of a debt or other duty. Common law developed two kinds of possessory lien: the specific (a lien on the specific property involved in a transaction) and the general (a lien for the satisfaction of a balance due, not confined to a specific property involved in a transaction). Courts of equity may, through the device of the equitable lien, recognize a creditor’s interest in a debtor’s property. Statutory liens are also available; developers and building contractors, for example, may use their interest in an improved site as security for payment (a mechanic’s lien).
A judgment as it pertains to a lien is a court-ordered lien on a debtor’s property, granted to a creditor to compensate for unpaid debts. A judgment lien typically arises after a lawsuit: a plaintiff who is awarded a monetary amount becomes a “creditor,” and the defendant who must pay that amount becomes the “debtor.” The judgment of this monetary amount is the basis for a judgment lien. Should the debtor fail to pay, the creditor can opt to enforce the judgment – through a judgment lien. In other words, a judgment lien is used to secure payment to a creditor and is enacted only after a debtor refuses to pay voluntarily. A judgment lien is satisfied when the property that is subject to the judgment lien is sold and the sale proceeds go to the creditor. A judgment lien that is placed on personal property is referred to as an attachment.
How to Make the Deal Work
There are basically three ways to make money with a real estate deal that has liens or judgments attached to it:
- Buy the lien and force collection.
- Get an agreement to collect the lien and do so for a share of the gross.
- Buy the property with the liens and negotiate a release of lien.
For sake of time and the length of this article, the only method I will be looking at today is getting the property with the liens on it and negotiating releases of the judgments and liens.
Get It Released
Getting a lien released typically occurs in one of two ways. First, if you satisfy the lien by paying the underlying debt in full, the creditor must execute a lien release that removed the lien from your property. Second, if a certain length of time passes, the lien will expire, and be automatically discharged or released. The exact length of time required for a lien to expire varies depending on the type of lien and the law of the state that applies to the lien. Of course as an investor, your time is of paramount value so waiting for the statue of limitations to expire is probably not your best option.
Now, if it is a judgment, also called a default judgment or a judgment lien that is a court-ordered debt to be paid, there is never a time it will be removed until you pay the court. There is not a statute of limitations in this case. The only remedy is negotiation.
The basics of getting these challenges handled goes something like this: Locate all lien holders except the mortgage and negotiate a release of lien. Get a written agreement signed from all liens before paying any. If there are several this will take a bit of juggling. If you feel comfortable with the amount agreed upon by the lien holder and you feel time is against you, you may choose to go ahead and pay it now, but a word to the wise; every time you spend your own money you increase your risk. The liens in superior positions might warrant doing so but the inferior liens should not be paid until you clear the way with the others.
You should also be aware that collection agencies buy the defaulted paper for pennies on the dollar, then they and their attorneys add fees and interest to the debt. A $5000 credit card bill could very easily swell to a 15 or 20 thousand dollar judgment over a few years of interest and fees and the worst part of it is that the collection agency probably bought the debt for anywhere from $250 to $1000.
You can try negotiating these liens and judgments yourself by simply calling the law firm who represents the lien holder, or the lien holder themselves and attempting to negotiate, but unless you are very patient with people who are experts at wasting time, then I suggest hiring an expert.
Hire an Expert
As usual, I am going to suggest that you do not waste your valuable time with things you are not an expert at. I have tried to negotiate judgments and trust me; it sucks!
On a recent deal that I did, my title company found a $22,000 default judgment from the collection agency for Citibank credit cards on the home. The truth is, I still had $40k of equity even with the judgment, but then again, why should I pay out $22k when I KNOW I can get it released for less?
I tried one time to call the law firm myself. As usual, my lack of patience got in the way of their moronic “Customer Service Representative”, and the conversation ended with my wishing them good luck at the foreclosure auction as they were in third position after a first and second mortgage.
I then called one of my attorneys who specializes in credit, bankruptcy and foreclosure. This guy is great and I have used him before to foreclose on people who would rather not pay their mortgage when I owner finance to them. He waited until a few days before the auction and then called the firm on my behalf. By the time he was done, I gave the firm for the collection agency a check for $2000 and him a check for $500. Now my equity is close to $60,000 instead of $40,000 and I also helped the economy a bit by employing my attorney as well.
A Word to the Wise
I know this goes without saying, but I also know there is somebody out there who will do it wrong and then whine to me about it, so here is a small disclaimer:
If the mortgage balance, plus the cost of bringing the loan current, plus a few thousand for release of lien and judgment fees, plus any repairs, is more than you’d pay for the house based on the MAO formula I have discussed in previous blogs then you don’t have a deal.
Also, you will want to make these guys nervous and run it down to the wire, but be sure you have enough time left to negotiate release fees before a foreclosure takes place.
Once you have all the liens and judgments handled, record the release of liens and the deed. If you do it before you have all the paper issues under control, you may find that the law firms do not want to negotiate. Think about it; if you were in their shoes would you be willing to negotiate if you knew that some investor just bought the house out of a foreclosure? There’s no reason to incur closing costs by recording the deed until you know you have a deal.