Board Topic: lien clearance mandatory prior to loan?
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lien clearance mandatory prior to loan?

Posted by: miamicanes Dec 17 2004, 03:27 PM
I just purchased a vacant lot in the City of Miami at a tax auction. The amount I paid was approximately $20,000 less than the amount necessary to fully satisfy all of the liens that survived the sale (there was a huge lien by the City of Miami for the property's zoning violations and demolition after it became an abandoned crack house). I "inherited" the (deceased) former owner's Homestead Exemption and will be filing to officially register it as my own Homestead before the deadline in March.

As I understand it, the lot's status as a homestead means that the City can't foreclose on it to recover the unsatisfied portion of the lien... but the lien will remain forever and continue to accrue interest until it's fully satisfied, so if I ever go to sell the house or lot, I'll have to satisfy it then (if I haven't done so earlier).

The big question is... do I definitely need to have it satisfied right now, before I can successfully quiet title, obtain title insurance, and/or qualify for a construction-to-permanent loan? Or is the lien something that's "there", but not really a big deal (besides compounding interest) or something I need to worry about until the day I go to sell the property?

The problem is, I spent just about all of my savings on the lot's purchase. In the grand scheme of things $20,000 isn't a huge amount (relative to what I would have paid for the lot at market prices, and what the lot + house is ultimately going to be worth once it's all done), but it's more than I can afford to cough up as cash right this instant. If the only consequence of leaving the lien unpaid is accruing interest and the inevitability of facing it someday when I need to sell the property or something, I'm perfectly fine with leaving it "as is" for the next year or two so I can worry about getting my house built first.

There IS one thing in my favor... the lot's fair market value is SUBSTANTIALLY more than the amount I paid + the amount of the unsatisfied lien... and even the (laughably low) "official" tax assessment value is more than the amount of the remaining lien.

If I do need to clear the lien before I can qualify for a construction-to-permanent loan, is any legitimate, non-predatory lender (WaMu, etc) likely to consider the possibility of letting me take out a "lot purchase" loan for the amount of the lien (possibly requiring a few thousand dollars more from me if they insisted on undervaluing the lot and a $20k loan exceeded their maximum loan-to-value)? Or am I basically stuck with having to cash advance $20,000 from my Visa Gold card at 21% interest to pay off the lien so I can quiet title, and then try to get an equity loan against the now-lien-free lot to pay off the cash advance? Conceptually, it doesn't seem like using a lot purchase loan to pay off the small remaining lien on a valuable lot that I otherwise own outright and hold the deed to would be that big of a deal or more than a polite formality to make the title insurance company happy... but lenders sometimes seem to get really hung up on and weird about some things, and liens seem to be one of them...

I was originally planning to take a day off from work next week to initiate the quiet title lawsuit, but I don't want to blow the money on a lawyer and title search (I have a photocopy of the title search from the Court tax deed file, but I assume any lawyer I hire will probably insist on getting a "fresh" copy of his own) only to be told 3 weeks later that I'm wasting my time and money until the lien is cleared. :-(

Posted by: loanuniverse Dec 17 2004, 09:42 PM
A couple of things:

1-Any lender giving a loan out secured by property will run a title search and require that the lien gets paid.

2-I believe that a homestead exception is for the house where you live. Making this case for a vacant lot will be difficult.

3-You mention building a house? I hope is not in this lot, because the lender will probably not do a construction loan, and the city will probably not issue the permits.

4- You need to consult an attorney and spend a few hundred for legal advice.

Posted by: miamicanes Dec 18 2004, 11:19 AM
From what I learned yesterday afternoon, homestead exemption can apply to a vacant lot if it's my only real property. I believe it's because the legal concept of "homestead" pre-dates and ignores the modern reality of zoning, and in a zoning-free universe I could theoretically pitch a tent or park a trailer on the lot and live there. The fact that I actually rent a house and physically reside elsewhere doesn't make a difference. An old person living in an assisted living facility can still own a house that's his or her official homestead, even if they'll never be able to live there again and the house will be rented out to others for the remainder of that person's life. Once again, the legal rationale is that he or she might be able to do so, or even have no other alternative besides homelessness someday, so the law exists to protect it for that eventuality.

I haven't found anything in the City's ordinances or zoning that would cause a lien to preclude getting a building permit. Objectively, it doesn't seem like it would be in anybody's best interest -- in a declining or borderline slum neighborhood, it would effectively accelerate the downward spiral by preventing people who owe the City money from improving their property so they could sell it for enough to satisfy the lien. The ultimate victims would be the lien-burdened property's neighbors. I know if there were a run-down property on my street, and we found out that its owner wasn't allowed to fix it up, I'd be the first one renting a bus to take the neighbors to Coconut Grove to picket in front of City Hall and angrily condemn the city's stupidity on Channel 7 and Telemundo wink.gif

I'll take your word for it about lender unwillingness to give loans for properties with liens. However...

If a valuable property is worth significantly more than a non-forecloseable lien, why wouldn't a lender be willing to charge a fee for the service, officially record the new mortgage, and pay the lien directly out of the loan's available balance (requiring official recognition of the lien's satisfaction before disbursing further funds)? Even if it took a few weeks or months for the satisfied lien to be officially cleared in public records, the lender would know beyond any shadow of doubt that it was satisfied, because it would have written the check that satisfied it and sent it directly to the lienholder. Yes, it's more work than the ideal norm... but it's also another opportunity for the lender to make money by providing a valuable service for an additional fee that will ultimately earn it another profitable customer.

Posted by: loanuniverse Dec 19 2004, 03:27 PM

I would feel uncomfortable doing this type of deal without sound legal advice. You are making a lot of assumptions regarding what you can or can not do with the lien and the property. You might be right, but an ounce of prevention…….

Regarding the way that the loan could be structured to pay the lien, you are right it is theoretically possible, but you first have to find a lender willing to do all of that, and at the same time that has the expertise to know what needs to be done. It is a $20,000 loan after all, you might want to try to stay away from even giving the land as anything other than an “abundance of caution” collateral.


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