What is a Lien?

What is a Lien?

by Adam Smith

If you are considering investing in the real estate market you should be familiar with a couple of items before you dive into the market. One of these legal terms that many people are not entirely comfortable with is the term lien. To explore how a lien works let's take a look at an example.

How a Lien Works

As a real estate investor you decide to purchase a prime real estate investment property. You have decided to purchase a house that you hope to rent out, potentially as a rent to own property. Your real estate agent has told you the asking price for the house is firmly set at $223,000. This represents a fair price for the market and you decide this investment property will provide you with an excellent return.

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Many of us have heard the term foreclosure in relation to other individuals and understand that it is not a pleasant term, but do not have a firm grasp on what it actually means. Before we go any further in discussing the profit potential available through foreclosures it is critical that we define the term foreclosure.

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In order to purchase this investment property you will need to borrow money from a bank. Assuming the appraised value of the house is close to the sale price of the house then the bank will be willing to offer you a mortgage loan that is secured by the house and property it sits on. As the bank processes the loan application the bank will place a lien on the investment property. This lien merely serves as a legal document that gives the bank the legal right to assume possession of the property should the occupant default on the loan. In such a case the bank will require that it has the first lien on the investment property meaning they are in first position to control what happens to the property. Others may possess liens against the property but they will have a legal standing behind the possessor of the first lien. Such liens are often referred to as second or third liens, depending on their position.

Thus if for some reason you are unable to make payments on your mortgage loan then it is likely the bank will have to exercise its lien against the property and perform a foreclosure on the property. In this manner the bank secures the loan by establishing a lien against the property and thereby ensuring their legal right to the asset should a default occur on the loan.

In order to truly succeed in the real estate market it is essential to have a sound understanding of all the legal ramifications and principles that form the basis of the lending documents. Being informed on how a lien works and what it means to you is just part of the knowledge you need to have to make the most of your investment property ventures.

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Several people, especially those new to real estate investing, will prefer bank foreclosure to any other form of property buying because they think that they are safe to buy. Their understanding is that the bank owns the property and therefore they are free from all liabilities and other negative encumbrances. Though a bank forclosure can be safe, the bank never owns the property. The property has only been pledged as collateral, meaning in the event of default of loan payment, the property should be disposed to redeem the loan.

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If you have friends that happen to be attorneys, or even a real estate attorney, you can tap into their wealth of knowledge and understanding of the legal principles related to the real estate market. A real estate attorney can serve as valuable resource as you plan your real estate investment strategy. Tapping into your professional network of friends and mentors may help you get in contact with a real estate attorney that can offer more insight into liens and other legalese that you may not be familiar with initially.

Adam Smith is an informational author for 10X Marketing. To learn the one great way to make money from Robert Allen with your small business, please visit OneMinuteMillionaire.com.

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