Avoiding Contractor Liens Against Your Property
How many times have you as a homeowner been worried that the contractor you hire for the project you have in mind may end up filing contractor liens against your property, and worse, against your will? It happens more often than one may think but hopefully our How To End Up With A Contractors Lien Against Your House article will provide you with insights to help ensure that such a thing will never happen to you!
A little background on Contractor Liens
Contractors Liens were established to ensure that contractors would receive a level of protection when a customer-owner of a property failed to pay for services rendered. Of course, the counter weight to this has been the requirement that contractors be licensed and in many cases state certified so that the property owner also has some level of assurance that when they pay or give a deposit, they won't have to worry about ever seeing their money again (and sincerely why it is a good idea to ask a small jobs contractor if they are bonded such that if they do run off with your money, the bond will pay you while the bondsman goes out and finds the contractor!).
This being said, when a homeowner has a contractor perform work on their property, it is strongly recommended and actually a non-negotiable requirement that a homeowner request a Waiver of Lien from the contractor stating that they are releasing the property owner of any future claims. Specifically, a waiver of lien (or lien waiver) is a document from a contractor, subcontractor, materials supplier, equipment lessor or other party stating the contractor has received payment and thereby waives any future lien rights to the property for the amount paid. This gives the homeowner assurance that after the job is paid for, the property owner won't come to find out later that either the contractor in charge of the project, an unpaid subcontractor, or even an equipment vendor has, to the homeowners surprise, filed a lien against the homeowner's property because they were not paid for services or products provided. Without this Waiver, any unpaid amounts to any entity involved in the project may and can end up as a lien against the property. And unless the homeowner can produce this document, the homeowner may have to pay that subcontractor or vendor again to have the lien removed!
How to End Up With a Contractors Lien Against Your House
Many times, when a homeowner is attempting to get estimates for work projects such as a roof replacement. They evidently want the work done, and of course, they want it at the best possible price. But what exactly is the best possible price in the eyes of a normal forward thinking person? Well, at the end of the day, most people just want to know they are getting a deal, and that they just simply did not over pay. And this is a fair expectation! Nothing wrong with that. The problem is: most service providers do a poor job at expressing and/or communicating to a prospective customer the VALUE of their services to the point that they begin to treat their service more as a commodity (where it becomes a race to the bottom on pricing). However, this “race to the bottom” approach can potentially create a whole new set of problems for the contractor AND the homeowner—even if the contractor had no intention of ever filing any kind of contractor lien against their customer! On the other hand, the property owner is so focused on price that they fail to realize this may be putting them in potential jeopardy down the road when their bargain price comes back to haunt them as liens filed against their property!
How Did It Happen?
Take for example, a well known and established contracting company which has been around for over two decades. And say the company was evidently taken over by new management. Unfortunately, the new managers don't really understand the value of their services such that they quickly engaged in the practice of being a regular low bidder on jobs. This practice effectively ensures that they would get contracts much of the time. And from their customers point of view, they were pleased and happy that they got a great deal because of course, they would not be paying what the higher bidders were asking. Coincidentally, say some of the homeowners didn't even pick the lowest estimate (despite this contractor believing their bid is the lowest, the customers sometimes choose the in between bidder). However, and despite all good intentions by the new managers, a tremendous nightmare begins to brew at the contractor that even the managers don't realize will be occurring (yet)!
As the contractor wins more and more jobs, it begins ordering materials and paying the labor to do the jobs; and of course, waits for payment from its customers and in some cases, insurance companies that are paying for damaged property claims. The contractor also has overhead to maintain so even more capital is being used, and as it grows it needs even more capital to pay the increased overhead. Evidently, the managers realize that the cash flow isn't sufficient to cover ongoing expenses, so the contractor begins requesting credit terms from both their materials suppliers and their labor vendors. Even smaller contractors that assisted by providing site inspections and things like running permits start offering the contractor credit terms since the contractor is growing quickly and accumulating a lot of new business.
Unfortunately, the cash flow problem becomes worse when the contractor then has to start making interest payments on all the debt and thereby eroding their profits even further (from the already low margins they had established in their bidding strategy). What eventually happens is that they reach the point where they can no longer pay their suppliers and vendors and begin defaulting on their debt. And of course, one would think they quickly retreat to a bankruptcy solution where they can pay the vendors in smaller amounts until they catch up right? Wrong. What the suppliers and vendors do then is turn around and immediately file construction liens against the property owners on which they had performed services and were not paid! To the surprise and nightmare of every one of those homeowners, the lower bid and “deal” on their project quickly turns into a potentially-foreclosure triggering event. Each and every one of those vendors and suppliers has the right to record the liens because most of the homeowners did not have a Waiver of Lien signed by the contractor. And as the services were performed and not paid for (the money may have been paid to the contractor but the contractor did not pay them), the homeowners now have the obligation to pay every one of those suppliers and vendors, to: a) get the lien removed, and b) in some cases effectively paying twice if they originally paid the contractor but the contractor failed to pay them.
How To Avoid Construction Liens Altogether!
What should have happened was that the homeowner should have first requested a Waiver of Lien from the contractor, and through that contractor, a waiver from any and all the vendors and subcontractors involved in the project. Second, the homeowner should NOT have gone after the lowest bid or the bid where the customer felt they got the services they needed for a “bargain.” We run into this scenario sometimes with prospective customers where they tell us that such and such contractor told them “you don't have to pay a dime on your claim” or “we'll beat any and all other estimates!” What we make these customer-prospects aware of is that you can't just “waive” deductibles and more importantly, that by going that route or with low bid estimates they may be lining themselves up for a potential future lien when the low bidding contractor fails to pay the suppliers and vendors they engaged to complete the project. It may not have been the intention of the contractor to put the homeowners in that position, but it does not absolve that contractor of the obligation to pay the suppliers and vendors either. Finally, a project should never be looked at from just a pricing perspective, and more from a quality of materials and even more specifically, the levels and types of warranty of the materials. Why? Because as we've written in other articles about warranties, the value of a project is the sum of its parts; not the sum of the lowest parts.
Use this How To End Up With a Contractors Lien Against Your House post as a guide and remember that the use of recommended manufacturers materials extends the life of your warranties, and a qualified contractor will never be the lowest bidder on a job.