Many people consider lien position an important concept when it comes to real estate investing.
Lien holder position is not something you want to ignore because doing so could be detrimental in the long run. Depending on what position you hold, you can have less or more risk for your investment.
Read on to learn more about this important concept and how it can affect your investment opportunities.
Order of Liens on a Property
There are three main positions when it comes to liens. There can be more, but for our purposes, we’ll talk about the three. These positions are:
- First Lien
- Second Lien
- Third Lien
The order of liens on a property is very important. Liens are used frequently in lending on real estate.
What is First Lien Position
The first position is the most important because it has the first claim on the property.
If there is ever a situation where the property needs to be sold, the holder of the first position receives payment first. This is why it is so important to have a good understanding of what your lien priority is in any real estate investment. Lien priority affects your ability to receive payment in case the borrower defaults and the property enters foreclosure.
If you are looking to invest in real estate, do the research and understand the different types of liens attached to the property. Often, there might be one or two liens on a property.
Knowing the legal claims against the property, will help you make informed decisions about your investment risk.
Owning the first position is the most important and gives the investor the greatest level of security for their investment.
What is 2nd and 3rd Lien Position
The second and third positions are the next most important after the first position. If there is ever a situation where the property needs to be sold, the holder of the second and third positions will be paid in order.
This is why lien priority is important in real estate. For holders in the number 2 or 3 positions, they are exposed to more risk. It is possible for these lien holders to miss out if the outstanding debt exceeds the value of the property.
Types of Liens in Real Estate
There are three types of liens that can be placed on a property. The types are as follows:
Mortgage Lien
This is the most common type of lien. It is used to secure debt against the property. In these cases, typically the lien holder is the mortgage lender.
Tax Lien
This type of lien is used to secure taxes that are owed by the owner. This could be federal income taxes or unpaid property taxes. The federal and/or local government(s) can place a lien on the property and ultimately take possession of it.
In the case of a tax lien, lien holders with priority can lose out when local or the federal government goes after a property owner
Mechanic’s Lien
This type of lien is used to secure services or materials that have been provided to the property. It is common in the construction industry, and the lienholder has the right to take possession of the property if the debt is not paid.
Understanding the different types of liens that can be placed on a property is important for anyone looking to invest in real estate. Make sure to understand how each type of lien will affect your ability to sell or refinance the property.
Remember, the first position is the most important because it has the first claim on the property. If there is ever a situation where you need to sell or refinance, you will have to deal with whatever types of liens are in place before obtaining a clear title.
How Lienholders Get Paid
In the case of a foreclosure, the lien holder in the first position or senior position will receive the proceeds before any junior lienholder (second and third positions). This means that a junior lienholder has more risk in the case of foreclosure.
This is know as the “First in Time, First in Right Rule.”
Often, the first lienholder is a mortgage lender that issued the original mortgage. If a second mortgage is active, that lienholder will take a junior position to the first mortgage holder.
In the case of property tax liens, these tax liens outrank senior and junior lienholders. The government will take the property if the taxes are not paid.
Invest in Mortgage Notes and Take First Lien Priority
Interested in additional information about using lien position to create passive income streams for yourself? One form of this type of passive investing involves investing into mortgage notes.
Investing in notes that have a first position gives the investor lien priority over any other type of lien.
This means that as a note holder with a first priority lien on the asset (the property) you are protected in the case of a default. All of Secured Investment Corp’s mortgage investment notes take a first position with the property held as collateral on a private money loan.
Learn more about available properties you can invest into clicking the button below.
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Product & Brand Manager
As Cogo Capital’s Product & Brand Manager, Charlie brings extensive experience and a broad perspective on digital marketing to the marketing team. Working with department managers, Charlie’s mission as brand manager is to elevate the visibility of the Cogo Capital brand through content development, digital advertising, and SEO to generate traffic and leads for their sales teams.
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