REAL ESTATE: Priority of Liens
Why and when should you know about the priority of liens on Colorado real estate?
Some reasons may surprise you but you really need to know if you are:
- buying a house out of foreclosure;
- obtaining a judgment against a debtor;
- dealing with a worker who has added something to your home but, for whatever reason, has not been paid;
- looking to foreclose on a second mortgage (or deed of trust) on a rental property that you own.
A lien is an encumbrance on a property. Colorado law provides that liens are prioritized in a certain order to determine payment rights and the foreclosure process. There are numerous ramifications on how various liens play out. Many of them are tricky, but you should know the basics, although you might eventually need the assistance of competent counsel.
One basic tenet is that real estate taxes have priority over all other liens. If unpaid, they are the first lien and can’t be extinguished by other liens. Second in line is the so-called super priority lien (“super lien”) created by the Colorado Common Interest Ownership Act (“CCIOA”) that was enacted by the Colorado legislature to allow homeowners’ associations to recover at least some back assessments when a homeowner defaults. The super lien, however, is limited to an amount equal to the monthly assessments that would have become due during the six months immediately preceding either a foreclosure by the association or the holder of the first deed of trust (which may not be a first lien.)
A deed of trust or mortgage is actually third in line, behind the real estate tax lien and the super lien. Fourth in line is the association lien or assessment of charges above and beyond those assessed for the six months preceding the initiation of the foreclosure. In other words, if the homeowner owes 10 months in back assessments, six months falls into the super lien in second position and the remaining four months fall into fourth position.
Next are second mortgages which fall to fifth position if the community is subject to CCIOA and a super lien. Finally, the sixth position, seventh and so on are any third mortgages, mechanics’ liens, judgments and other encumbrances against the property.
A mechanics’ lien, or a lien for unpaid work on the house, actually trumps all liens except the real estate tax lien, the super lien, and the first mortgage lien, and can even take priority over the first mortgage lien if the work was started before the first mortgage was filed. This exception provides protection for the worker who improved the property who can then foreclose without having to deal with the first mortgage or deed of trust.
Recently, the super lien has created some nightmarish situations. An unscrupulous group of investors has been purchasing lien assignments from homeowners’ associations when they learn that a property is in financial trouble. This group then lays back, waits for the bank to foreclose on its first deed of trust and then swoops in after the foreclosure is complete to either collect the amount of the super lien, or worse yet, initiates a judicial foreclosure to try to steal the property from the unsuspecting bank or the new property owner. This has caused expensive litigation.
There are countless other issues involving lien priorities. When in doubt as to how these lien priorities work, consult a competent real estate attorney to assist you before you even think about fighting that battle on your own.