When it comes to real estate, liens and lien priority are key legal concepts to know.
Liens and Real Property
A lien is written notice that, when recorded (i.e., “perfected”) attaches to real property.
A recorded lien “puts the world on notice” that a creditor has a money claim against the owner of the property.
By attaching a lien to the debtor’s real property, the creditor can effectively use the property as collateral for the debt that is owed. In this way, the creditor can pretty much ensure that he/she will get paid.
How does a lien ensure payment of the debt?
Well, when you go to sell or refinance a home, you must have clear title. If a lien is recorded against your property, it will be a “cloud” on title. This means that in order to clear title, you will have to pay off the lien. So, the effect of a recorded lien is that you cannot sell or refinance your home until the lien is removed (i.e., paid off).
Liens can be voluntary—for example, a lien given to a lender in exchange for money to purchase a home, or they can be involuntary: for example, a mechanic’s lien.
Establishing Lien Priority
In instances where real property is foreclosed on, lien priority determines the order in which creditors will get paid from the proceeds of the sale of the property.
As you might expect, this is critical for creditors because it means that those who have liens of lesser priority run the risk of not getting paid at all.
The general rule with regard to lien priority is known as “first in time, first in right.”
This principle says that earlier recorded liens have priority over later-recorded liens.
While that may be the general rule, lien priority varies from state to state—although most states do give tax liens priority status.
Georgia’s lien statutes describe what liens are available in the state.
They also establish the priority of liens.
Understanding liens and lien priority is important if you own real property. If you have any questions about liens, consult experienced real estate counsel.
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