Mechanics liens are a legal claim against a property that has been remodeled or improved. In essence, mechanics liens are legal documents that reserve the rights of the filer to seek unpaid compensation. Typically, mechanics liens are usually filed by contractors, subcontractors, or suppliers if they have never received payment for the work they performed or the materials that they have provided on the property.
Mechanic’s liens create a cloud on the title, which means that it will appear in the public property records. If the owner of the property does not pay off the mechanic lien, the lien will stay with the property. This comes into play when the property owner attempts to sell, as they must be resolved before ownership of the property can change hands. Banks and lenders are usually not willing to refinance homes or lend against property that has liens. Unresolved mechanics liens can threaten real estate transactions, and they could potentially pose a threat to the property owner’s claim to their title.
Examples of Mechanics Liens
Two of the most common scenarios that involve mechanic’s liens are when the property owner doesn’t pay the contractor, or when the contractor does not pay the supplier of subcontractors. In both situations, the burden of paying mechanics liens falls on the property owner. This is relatively straightforward when property owner does not pay the general contractor what they owe for the work they received on their home. However, even if the property owner did pay the general contractor, the property owner can still receive a mechanics lien. This happens when the general contractor does not pay the subcontractors or suppliers like they were obligated to do. The suppliers or subcontractors have a right to place mechanics liens on the home to receive the appropriate payment for their contribution in helping with the home renovation. Unfortunately, in these cases, the responsibility of paying off the mechanic’s lien still falls on the property owner.
Title Companies and Mechanics Liens
When a property is being sold, it is very common for a title company to have to deal with getting liens resolved. One job of the title company is to ensure that the buyer of the property is receiving title free and clear of any previous liens. The title company will contact the mechanics lien holder to request a payoff (the amount that will satisfy the lien). Typically, the amount will then be held back from the sale transaction to satisfy the lien. The money will go directly to the lien holder.
For example, a subcontractor has placed a mechanics lien on a house with the intent to receive payment for 5,000 of work. The property the mechanics lien is on is being sold for 100,000. The title company will take the 100,000 from the buyer and then deliver 95,000 to the seller. The title company would then pay the 5,000 dollars to the lien holder.
How Mechanics Liens Help Suppliers and Subcontractors
A mechanics lien will encumber the property. Mechanics Liens are public record and will appear on a title search for a property. This means that when the property owner goes to sell the property, they are going to have a very difficult time moving forward with a lien on the property. In some states, the mechanics liens can even take priority over the lenders interest. This can be very helpful, as the lender will usually step in and demand action from the property owner because they also want to get paid. From the perspective of the party trying to receive payment, mechanics liens can be more effective than filing a lawsuit.
Reach Out to Mathis Title Company
If you have any questions about dealing with or filing a mechanics lien, be sure to reach out to Mathis Title for more information.