Understanding Contractor Liens and Financing: Protecting Your Property
When working with contractors, understanding financing and liens is essential. A lien is a contractor’s legal claim against your property for unpaid work or materials. Failing to manage payments properly can result in a Mechanic’s Lien, which can affect your ability to sell or refinance your home. Below, we explain what liens are, how to avoid them, and what disclosures contractors must provide.
What is a Lien?
A lien is a legal claim against your property that ensures payment to a creditor, in this case, a contractor, subcontractor, or materials supplier. If the debt is not settled, the lien must be paid when the property is sold or refinanced.
What is a Mechanic’s Lien?
A Mechanic’s Lien is a contractor’s legal right to claim unpaid compensation for labor, services, or materials provided for a construction or renovation project.
- Applies when a contractor, subcontractor, or supplier has not been paid for work exceeding $500.
- The lien attaches to the property even if the homeowner already paid the contractor but the contractor failed to pay subcontractors or suppliers.
- This can delay property sales, prevent refinancing, and lead to legal action.
How to Protect Yourself from Liens
1. Require a Contractor’s Affidavit of Final Release
Before making your final payment, request a:
- Contractor’s Affidavit of Final Release
- Final Waiver of Mechanic’s Lien
These documents confirm that all subcontractors and suppliers have been paid and protect you from unexpected claims.
2. Verify Subcontractor Payments
- Request a list of subcontractors and suppliers from your contractor.
- Check with them directly to confirm they’ve received payments.
- Require lien waivers from all subcontractors and material suppliers before making final payments.
3. Make Payments in Installments
- Never pay the full amount upfront. Instead, schedule payments based on completed milestones.
- Withhold final payment until all work is completed, permits are cleared, and lien releases are provided.
Required Disclosures from Contractors
Before signing a contract, contractors are required to disclose certain information in writing. These disclosures apply to:
- General Contractors
- Residential Contractors
- Swimming Pool and Spa Contractors
Disclosures include:
- Explanation of lien rights for subcontractors and suppliers
- Details of the contract terms and payment schedule
- Information on project timelines and expectations
Failure to provide these disclosures can be a red flag and may indicate a lack of professionalism or compliance.
Final Thoughts: Protecting Your Investment
Avoiding Mechanic’s Liens requires careful financial management and clear documentation throughout your project.
- Always verify that subcontractors and suppliers are paid before releasing final funds.
- Never sign a contract without reviewing the contractor’s required disclosures.
- Request lien waivers and ensure that payments are properly documented.
By taking these precautions, you can protect your property, avoid legal complications, and ensure a smooth home improvement process.
