Liens 101: A lien is a legal mechanism that uses the title to your property as collateral to ensure payment to contractors for materials or labor. If for example you hired me to tile your bathroom floor for $2,000, after I complete the job there is a set amount of time you have to pay in full before I am allowed to "lien" your title. When a title is liened there are two main concerns for the home owner. The first is lenders will not touch a property with a lien, it must be cleared first. If you're looking to sell or refinance you are hosed until the lien is lifted. The long term ramifications could include the bank foreclosing your property to pay off the lien, but this process can take years from my understanding and often times extensive legal fees for the contractor.
So you may be asking yourself, why did the contractor lien you? Why didn't you just pay the contractor what he was owed and this problem would have never come up? Come on dead beat, pay up! If it were that easy, then I wouldn't have a story to tell now would I?
To explain this modern day Catch 22 I must give you a three sentence overview on 203K loans. 203K loans are deserving of a post of there own in the future, as they were the essence of how I pulled off this renovation; but, for now a brief overview will have to suffice.
203K Loan 101: A 203K loan at its core is a very low interest construction loan that is backed by the federal governments FHA (Federal Housing Authority) program. To lower the risk on these loans certain lender requirements exist, one being most banks require a general contractor to run your subcontractors. (They assume you need a babysitter) In this case two checks are issued to the General Contractor "Babysitter", the first is 50% up front and the final 50% upon completion.
What happens if the bank pays your General Contractor the first 50%, but the General Contractor does not pay his subcontractors? Maybe the GC just took a surprise vacation somewhere and fled the country, bet it on some high stakes poker, or used your money to pay off other debts. Your first thought might be, no big deal you have a contract with the GC and he got paid. Not my problem right? Surprise... Surprise... I thought the same and was completely wrong!
In my case the general contractor used my money to pay other business expenses and claimed he would use the second 50% to pay his subcontractors. For obvious reasons I didn’t want to pay the general contractor another dime due to trust issues, however he threatened to sue me for contract breach if I paid his subcontractors the remaining amount directly. The subcontractors on the other hand wanted the money for completing work and were threatening to lien the house.
The Catch 22: (“Screwed Either Way”)
1) Pay subcontractors directly to prevent getting my home liened, thus getting sued by the general contractor for contract breach
2) Pay the general contractor, risk losing all the money if he doesn’t pay the subs
[THIS IS WHERE IT GETS EXCITING!]
If you’re still actually following along with this legal predicament then I’m about to explain how this got worked out after 3 months of headaches. My contractor agreement had a clause that stated the bank didn’t have to pay the general contractor if there were unpaid sub contractors or if liens were on the property. It also stated the general contractor was legally responsible for any legal fees I had to pay to remove a lien.
Solution: The solution came down to telling the general contractor I was asking his subs to go forward and lien my property. At this point I would be starting the legal process, and per our agreed upon legal contract he would pay for my laywer. The GC, not wanting to occur legal fees, quickly forwarded me a contractor termination agreement that allowed me to pay his subcontractors directly. At this point the subcontractor lifted the lien and as of two weeks ago the bank released final payment.
I’m now officially lien free and have all my subcontractors paid off! Lessons learned:
1) Have a contractor agreement on large projects!!!!
2) Make sure your subs are getting paid!!!
3) Upon larger payments require a notarized Lien Waiver form
(Essentially a very fancy receipt that legally prevents contractors from being able to lien your title)
(Special thanks to Allison and her legal input throughout this process!)
