Monday, May 11, 2009

Due Diligence on Apartment Building – Part 4

A group of people who bought lands at New Mexico tax auction, later discovered there were demolition and weed cutting liens on the properties, in the amount which was more than the property values. One buyer paid $800 for a property, only to find out a lien of $20,000 (Source: Clovis News Journal).

A condominium in Colma, California, was foreclosed by the HOA for $7,000. I was told that a young couple bought it. I don't know whether they realized that there was a mortgage lien in the amount of $600K, much more than the condo market value of around $300K. So the young couple got property worth of $300K for $607K. Great deal? Yeah, right!

Title and ownership information is a critical consideration when buying any kind of real properties, whether it is land, or single family or even apartment building. There are a lot of things which can encumber the title of a property. The simplest example is a mortgage. When you take a mortgage, the lender places a lien in the property as collateral. Let’s say one property has multiple liens at any one time. The priority of the liens is normally based on the time it gets recorded. The lien which is recorded earlier, takes higher priority over the lien which is recorded later. There are exceptions to this rule. Property tax takes the highest priority over all other liens. IRS lien has 120 days of redemption right, no matter when it is recorded.

Example of other type of liens:

• Home equity line of credit
• Mechanic’s lien: Lien placed by contractors for nonpayment of labors and/or material at the property
• Municipal services lien: Lien placed by the municipal for unpaid utilities and school assessment
• State income tax lien: Lien placed by the state for unpaid state income tax
• Judgment lien: Lien as a result of financial judgment
• Child support lien: Lien for past due child support

Other things that can impact the property’s title:

• Recorded lease option
• Property restrictions (eg: BMR property can only be sold at an approved price)
• Partial interest

Remember, something that sounds too good to be true, it probably is! Do your necessary due diligence.

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