Shrewd property investors know that the American housing market offers plenty of opportunities for a quick profit when other homeowners overstretch their finances. When a homeowner can no longer afford to make his or her mortgage payments, he or she may look to quickly sell on the property before an unmanageable debt grows. Find out how a lis pendens filing could benefit property investors, and discover more about what this legal term means.
Lis pendens comes from Latin and translates as 'suit pending'. In the modern property market, somebody files a notice of lis pendens against a property to show that there is some form of legal action pending. If somebody files a lis pendens notice against a property, the action becomes a public record, which means anybody (including potential property investors) can see that the current owner is probably in financial difficulties, even though a lender or other claimant has not yet taken action to recover a debt.
Reasons to file a lis pendens notice
Anybody can file a notice of lis pendens against a property. Most commonly, mortgage lenders will file the notice when the debtor fails to make a certain number of monthly payments, and the lis pendens notice becomes the first stage in the foreclosure process, even though the lender will generally still give the debtor an opportunity to take further action before the foreclosure process continues.
That aside, a lis pendens notice is not just for a mortgage lender. Contractors and other people working on a property may file a lis pendens notice against the homeowner if he or she fails to pay for work completed.
A lis pendens notice may also occur as part of divorce proceedings. In this case, the purpose of the action is to deter the spouse who owns the property title from selling on the property before a court rules how to split the value of the asset.
In all these situations the notice of lis pendens is the first stage before more formal litigation. However, the action is a warning to any interested parties that the home is subject to legal action, which may deter them from buying the property.
So why would this benefit a property investor?
Benefits for a property investor
A lis pendens notice can alert a property investor to an investment that could offer significant potential for profit. While the notice is a warning, this action also flags that the current owner may look for a quick, cheap deal. If a mortgage lender or other third-party is about to take more formal legal action, it's in the interests of the owner to quickly sell on the property.
A lis pendens notice also offers advantages over properties that have moved into formal foreclosure proceedings. First, possible buyers can enter and inspect the property like any other home for sale. You can also make direct contact with the seller, make an offer directly and buy the home as easily as any other property on the market.
However, the most attractive part of a lis pendens notice is that you can often get the property for a great price. At a foreclosure auction, you must often compete with other bidders. With a lis pendens property, you may not need to bid against anyone else, especially if you act quickly. By searching a public database of lis pendens notices in your county, you can rapidly find and act on these potential property investments.
Lis pendens notices and short sales
If you offer enough money for the debtor to pay off his or her debt, the claimant will remove the lis pendens notice from the property. However, in many cases, investors will offer an amount lower than the debtor's debt. In this case, the debtor must persuade the bank to accept a short payment or short sale.
Mortgage lenders are generally receptive to these offers. Although they will lose money on the loan, the amount recovered is normally higher than the amount they would get through a foreclosure, especially after fees. This outcome is also preferable for the homeowner, as he or she can walk away from the sale without a black mark on his or her credit report.
As such, it's important for property investors to negotiate the best possible deal. Find out how much the property owner owes, and consider an amount that balances profit (for you) and a favorable outcome for the lender and debtor. Your attorney can help you consider the right offer.
A lis pendens is a public notice that somebody is taking legal action against a property owner. Investors should talk to a trained attorney for more information and advice about how to most profitably acquire these properties.