Lien Sale

What Is a Lien Sale?

A lien sale is the sale of the claim — or a hold — placed on an asset to satisfy an unpaid debt. Typically, lien sales are conducted as public auctions, and the lien is on real estate, automobiles, and other personal property.

Depending on a particular state's laws, contractors, subcontractors, and suppliers may put a lien on a piece of property they have worked on pending payment for services rendered.

How a Lien Sale Works

Buying delinquent tax liens at a sale is becoming an increasingly popular form of investing and is similar to purchasing a long-term Certificate of Deposit (CD). However, unlike a CD, tax-liens cannot be sold back to the taxing authority and must be held until they are repaid. Redemption of the purchased lien is typically at a given rate of return within a specified time frame.

Lien sales for unpaid debts on a property can result in the amount owed increasing further. When the lien debt is sold, usually by a local government agency, the buyer can employ a lien servicing company that may add more fees and interest to the lien. This allows the buyer to see a return on their investment as the debtor must now pay the additional costs imposed.

In many instances, several notices of an impending lien sale will be sent to the debtor before a notice is filed stating the approaching date for the auction.

Although a debtor may owe taxes and other fees, there can be exceptions that will shelter their property and other assets from being subject to a lien sale. For example, disabled homeowners, senior citizens, and veterans could receive exemptions.

Active duty military personnel might also be eligible for an exemption for lien sales on their property. Each jurisdiction will have its own criteria, application process, and window of time when the responsible agency must be contacted.

Buying a home with a lien on it is not without complications.

There are limits to the interest rate amounts that a lien buyer can impose. Interest rate limits are set at the government level and vary by state. The bidding process is auction style, with the winner being the highest bidder. Because there is a limit to the maximum interest rate a winning bidder can charge, the amount the buyer pays for the lien is paramount.

Example of Lien Sale

As an example, if the maximum interest rate that can be charged for a lien is 12%, it is a good idea to put a limit on your highest bid. The lower the winning bid, the better. Since this is competitive, a buyer wants to limit the risk of not being paid back in a timely fashion.

Said simply, paying a 2% premium for the ability to charge up to a 12% interest rate is a lot better than paying a 9% premium.

Special Considerations

Owners of property that is subject to a lien sale can have their property removed from such sale by making payment arrangements to bring their outstanding debt up to date.

There may be special procedures for different types of lien sales, such as an auction for a vehicle of a certain value. How that is handled can differ from a lien sale for the contents of a self-storage unit if the owner fails to pay their bills to the storage company on time.

Notices for lien sales might be posted online by the overseeing local agency or in local newspapers.