Contractors have a unique business structure that can make collecting payments difficult. Unlike an expensive car that can be repossessed by the lender, contractors install materials and invest their time into a property without a guarantee of payment.
If a property owner refuses to pay up at the conclusion of a contract, a construction lien may be a great option to secure your pay.
This guide will give you the basics on what a construction lien is, why you might need one, and a quick step-by-step plan to protect yourself from defaulted payments.
What is a Construction Lien?
Before we dive into the mechanics of how to put a lien on a property, understanding what all it entails is crucial. A construction lien, sometimes called a mechanics lien, gives contractors a stake in a property if their bill is not paid promptly (or at all).
Suppose you worked on an owner-occupied residence in Arizona and you had a contract with the owner to install new cabinets for their kitchen remodel. When the bill comes around and the property owner refuses to pay, you can file a construction lien to offset your cost for the work. That means that you may gain a stake in the property until a time when the bill is paid in full.
Why Put a Construction Lien on a Property?
Chances are that contractors would rather be paid in cash for their hard work on a property rather than gain a stake in the home or business they worked on. The problem is that reclaiming money as a contractor can be complex. You may not be able to take back the work and materials you have already invested in the project.
A construction lien exists to give contractors some security in the event that someone defaults on their payment.
The person who owns the property with the construction lien is unable to sell or refinance until that lien has cleared. They may be able to use proceeds from the sale to pay off the lien, ensuring that every contractor has a fair chance at getting the money they are owed at some point.
Steps to Put a Construction Lien on a Property
In an ideal world, you will never need to file a construction lien with your clients. However, being left without recourse should a client refuse to pay can be devastating to your business, so it’s best to understand how to put a construction lien on the property.
Here are the four steps to follow :
Preliminary Notice
While the rules differ from state to state, filing a preliminary notice is typically the first step. You may also hear this called a prelien. States that require preliminary notices may also have strict timeframe and mailing requirements. It may be best to send notices when you have a signed contract. Also, sending via USPS certified with a return receipt can ensure the mailing goes smoothly.
In short, this notice makes the property owners and all other parties up the payment chain aware of the work to be performed and/or the materials provided. The preliminary notice may be packaged under a different name, depending on the state.
However, the message is the same: it outlines your right to secure a future lien if the project goes without payment. We recommend sending a preliminary notice for every project!
Notice of Intent
While a preliminary notice puts the property owner on alert that you have the right to file a lien in the future, a notice or letter of intent is a stronger message. Some states require a notice of intent to be served prior to filing a lien. It tells the property owner that you are on the path to filing the lien because they have not rendered payment. In many cases, this notice of intent is all it takes to get a property owner to cough up the cash for your services.
Keep in mind that not all states require a notice of intent. Still, it is advisable to issue one because it may resolve the issue without having to move forward on a construction lien.
File the Lien
If the previous two stages were unable to produce the payment, you will need to move full steam ahead with the plan to file the lien.
If you have lien rights and you have served all required documents to all required parties properly, you may want to consider preparing and filing a Claim of Lien to be recorded in the county where the improved property is located. Gather your contracts, all notices sent, open invoices, and any signed waivers, then refer to a lien processing company or construction attorney to help you determine if you have lien rights
Enforce the Lien
At this stage, you already have a lien in place on the property that prevents them from selling it without issuing the payment due for your services. A construction lien can be enforced, forcing the property owner to foreclose on the property at hand. While extreme and inconvenient, it may be the only way to secure the money you have yet to be paid. It is best to contact a Construction Attorney who can help you determine your next steps after a lien has been filed.
Once you get to the point of going to court to force the foreclosure, you may be surprised how many property owners will offer up payment rather than letting their interest in the property fold. It may require some upfront effort, but is necessary to prevent doing pro bono work.
Manage Your Construction Liens From Start to Finish
Are you ready to protect your business and secure payment for the hard work and special skills you bring to the table?
At Titan Lien Services, we’re here to help you protect your lien rights from start to finish. Our team can send preliminary notices, Notice of Intent to Lien, and Lien Claims in several states on behalf of your business, plus let you manage everything from one user-friendly customer portal. We have the expertise to get things done accurately and efficiently!
Explore our services or sign up today to get started.