Lien

A lien is a legal claim placed against a property that secures a debt or financial obligation. Liens serve as a guarantee that the debt will be paid, because the property cannot be sold or transferred with a clear title until the lien is satisfied. In real estate, liens are one of the most common encumbrances placed on property.

There are several types of liens relevant to tax lien investors. Property tax liens are placed by the government when property taxes go unpaid and typically take priority over most other liens. Mortgage liens are placed by lenders as collateral for a home loan. Mechanic's liens are filed by contractors or workers who haven't been paid for work performed on the property. Judgment liens result from court rulings in civil lawsuits.

The priority of liens — the order in which they are paid when a property is sold — is critical to understand. In most jurisdictions, property tax liens take first priority, meaning they are paid before mortgages, judgment liens, or other encumbrances. This priority position is one of the key reasons tax lien investing is considered relatively safe: even if the property goes into foreclosure through another lienholder, the tax lien typically must be satisfied first.

Understanding the lien landscape on a property is an essential part of the due diligence process. Investors should conduct thorough title searches to identify all existing liens before purchasing a tax lien certificate or bidding at a tax deed auction. Multiple liens on a property can complicate the investment and affect potential returns.