What Is a Vendor's Lien Deed?

Warranty Deed

A warranty deed is a legal instrument or document used to transfer ownership of real estate. It is unique to real property because real property is more likely to have limitations, conditions and claims against its ownership. Such limitations, claims and conditions are referred to as liens and encumbrances. A lien is a legal claim against the property. Liens often arise because a legal claim has been granted against the owner, and the claim is then recorded or "attached" to the property. A warranty deed, in addition to transferring or "deeding" the property to another party, also warrants that there are no undisclosed liens or encumbrances on the property. Real estate transactions often involve title insurance, which insures the claim or warrant of free title. However, they are not the same. The warranty deed is a representation; title insurance is a guarantee by usurping responsibility in the case the warranty was inaccurate.

Vendor's Lien

A vendor's lien is conceptually almost identical to a construction or contractor's lien. The concept is that people and businesses that work on a house and add value to it can make a claim against the house until they are paid, as outlined in their contracts with the homeowner. So, for example, if a contractor installs a new bathroom and the homeowner cannot or will not pay the contractor all of the agreed upon price, the contractor can file a vendor's lien against the house. Most states require the contractor to present the homeowner with a notice of the contractor's right to file a lien prior to doing any work. It gives the contractor a more expeditious means of getting paid and more legal leverage than just filing a lawsuit. The concept is that both parties are agreeing in advance that there is likely to be an interest by the vendor in the property until the vendor is paid in full. A contractor's lien and a vendor's lien are essentially the same thing. The terms may even be used interchangeably.

Rights Under a Vendor's Deed

Vendor's liens, in effect, waive certain rights of the homeowner. Under other circumstances, if a contract is breached, the legal recourse is to sue the person who breached the contract. Filing a vendor's lien does not require litigation, though all state laws must be followed in the filing process; but not everyone is entitled to legally file a vendor's deed. If you are entitled, it means you can, in effect, freeze the title to the property you are filing a lien on. Before title can transfer, the lien will have to be paid, removed voluntarily or removed by a court order. It shifts the onus, to a degree, from the vendor to the property owner by encumbering the title to the owner's property.

Applications

When a warranty deed is combined with a vendor's lien, it functions like a specific kind of mortgage. In many states, trust deeds are used instead of mortgages, though they are similar. They transfer interest contingent upon payment terms. States also have specific laws regarding foreclosure and mortgage defaults. A mortgagor is required to follow these guidelines carefully. The guidelines may require a fairly long process between the time the mortgagee defaults on the mortgage (or trust deed) and the time the mortgagor gets his property back. Mortgage banks do not use vendor's liens. But private parties may add a vendor's lien to a real estate sale in which they are carrying a personal note or mortgage. So, if you sell a property for $200,000 and agree to accept regular monthly payments for $100,000 of the purchase price, in addition to the warranty deed that transfers title to the new owner and the mortgage or trust deed that defines the promise to repay, you may also have a vendor's lien making it more expeditious for you, should the new owners default on their loan.