If You Want To Invest in Foreclosures – You Need to Understand Lien Priority

Lien Priority for a Property in ForeclosureIt is very common today for a piece of real property to have several different types of liens filed against it.  An example might be a property that is subject to:

  •  Deed of Trust
  •  Construction/Mechanics Lien
  •  Federal Tax Lien

Another might be subject to:

  • 1st Mortgage Deed of Trust
  • 2nd Mortgage Deed of Trust
  • HOA lien
  • Delinquent property taxes

As a general rule, in Washington State, the priority of liens depends on the order in which they were created.  Lien priority is established by the date the lien documents are recorded with the County Recorder.  The lien that gets recorded first gets first priority for payment.

There are a handful of exceptions to this rule.  Special attention must be paid by anyone buying a foreclosure property as to the status of any property tax liens, condo association liens, mechanics liens and IRS tax liens. 

Property Taxes and Special Assessment Liens from Municipalities – These liens always have the highest lien priority.  Any past due taxes will need to be paid and brought current as will any outstanding special assessment liens (typically for local improvements such as road paving or sewer lines).

Condominium Association Liens – Laws have been enacted in 16 states and the District of Columbia granting community association liens senior lien status under certain conditions.  These liens are referred to as “Super Liens”.  Washington State is one of the 16 states that allow for “Super Liens”.  In Washington State, a lien for unpaid condo dues is granted lien priority over liens that may have been recorded before it.  The statute does cap the amount to be paid to 6 months prior dues.

Mechanics Liens – Mechanic’s Liens, otherwise known as Construction Liens may have a higher lien priority than other liens recorded before it.  The determination of lien priority in the case of a mechanic’s lien is based upon the date the work started on a project or the date materials were first delivered to the job site.  For example, a property that had the following liens:

  •  
    • Deed of Trust* (Recorded August 15th 2006)
      • *Foreclosing Lien Holder
    • Mechanics Lien (Recorded October 12th 2006)

In this example the mechanics lien would take priority over the Deed of Trust, only if the work began or material was delivered to the job site prior to August 15th 2006.  If work commenced after that date or material was delivered after that date then the lien would have junior lien priority to the foreclosing deed of trust. 

There is also a secondary exception with mechanic’s liens.  Since Washington State’s statute provides for a time limitation as to the validity of mechanics liens, a mechanic’s lien is only valid for a period of eight months.

“No lien created by this chapter (Washington Revised Code RCW 60.04.061) binds the property subject to the lien for a longer period than eight calendar months after the claim of lien has been recorded unless an action is filed by the lien claimant within that time in the superior court in the county where the subject property is located to enforce the lien.”

Unless the claimant takes the additional step to convert the mechanics lien to a judgment by filing suit in Superior Court in the County of Jurisdiction then the mechanic’s lien will self expire after a period of eight months and one day.

IRS Tax Liens – An lien filed for unpaid income taxes is often mistakenly thought to have a higher lien priority than other liens.  This is not the case.  Lien priority for IRS Tax Liens is based upon the date of recording.  What is granted under federal statutes is a redemption period.  If a property is sold at foreclosure auction and the IRS has filed a tax lien against the property, then the IRS has a 120 day right to redeem the property to satisfy the unpaid debt.  If the IRS exercises their right to redeem, it can only do so by reimbursing the purchaser.

The IRS’ redemption payment to a purchaser of a property at a foreclosure auction would include the following:

The winning bid plus 6% interest from the date of sale,

PLUS

  • Expenses incident to the preservation of the property:
  • All payments made to senior lien holders,
  • Any necessary legal fees (i.e. title defense, etc.),
  • A prorated reimbursement for prepaid property taxes and fire insurance premiums.

MINUS

  • Any income the new owner received from the property and/or the fair market rental value of the new owner’s occupancy of the premises.

*Any improvements made to the property will not be reimbursed by the IRS.

It is important to note that the IRS has not redeemed a property in King County in over 4 years.  That does not mean that they won’t do it tomorrow, it just means they don’t do it very often.

When it comes to buying properties at a foreclosure auction, having detailed knowledge of the condition of title is important.  What is more important though is understanding lien priority and how the various liens of record may affect you and your investment.

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