Tax Lien University

Lien Priority

Lien priority describes the “pecking order” of liens. In other words, the order of importance each lien has over other liens. It also refers to the order in which claims against the property will be paid off. “First come, first served” is a general law, which governs the priority of liens. Generally speaking, the priority of a lien is established by the date in which it was publicly recorded. Therefore, a lien that is recorded or filed first has priority over a lien that is recorded or filed later, unless a statute or law indicates otherwise.

For example: the Marriott Mansion is ordered to be sold by the court to satisfy Bill’s debts. The property is subject to a $50,000 judgment lien, incurred as a result of a suit to recover a mechanic’s lien. $295,000 in interest and principal remains to be paid on Marriott Mansion’s mortgage. This year’s unpaid real estate taxes amount to $5,000. The judgment lien was entered into the public record on February 7, 1996 and the mortgage lien was recorded January 22, 1992.

If the Marriott Mansion is sold at the tax sale for $375,000, the proceeds of the sale will be distributed in the following order:

• $5,000 to the taxing bodies for this year’s real estate taxes
• $295,000 to the mortgage lender (the entire amount of the mortgage loan outstanding as of the date of sale)
• $50,000 to the creditor named in the judgment lien
• $25,000 to Bill (the proceeds remaining after paying the first three claims/liens)

However, if the Marriott Mansion sold for $325,000, the proceeds would be distributed as follows:

• $5,000 to the taxing bodies for this year’s real estate taxes
• $295,000 to the mortgage lender (the entire amount of the mortgage loan outstanding as date of sale)
• $25,000 to the creditor named in the judgment lien
• $0 to Bill (the proceeds remaining after paying the first three claims/liens)

Although the creditor is not repaid in full, this outcome is considered fair for two reasons:

• The creditor’s interest arose later than the others, so the others’ interest took priority.
• The creditor knew (or should have known) about the creditors ahead of it when it extended to Bill, so it was aware (or should have been aware) of the risk involved.

One of the major benefits of investing in tax lien certificates is that real estate property tax liens are almost always senior to any other lien, with the exception of other real estate tax liens and state-held liens in Arizona and New Mexico. Therefore, it is important to research the property and its owner to determine if there are any outstanding liens against the property that will not be extinguished by the foreclosure of the tax lien.

Massive Success,

Steven E. Waters
Creating Wealth Without Risk™
http://www.taxlienuniversity.com/

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