Mechanic's Lien of Flip Property

7 Replies

Hi Everyone!

I've never actually introduced myself on BP, so I feel I need to do so before I start posting questions :) My name is Steven Norton, and I am a structural engineer and real estate investor in the greater Denver area. I live in the Longmont area, and I am currently in an investment partnership for our first fix-n-flip property, own a rental property, and am lightly involved in a commercial warehouse purchase. Before jumping into any of these, I have gained so much valuable insight and advice from BP, so thank you all for your input and advice!

That said, I'll jump into my question(s) and relevant background. We were recommended a contractor for our flip from a friend who had used him. We set up an interview, asked a bunch of questions, and had him walk through a number of properties with us to get his pricing basis as well as work with his personality. We purchased a SFR in February, signed a contract with this contractor, and began demo/reno shortly after. All looked bright and happy.

Through the project, a few small issues with the contractor surfaced, and we started getting everything in writing: change orders, designs preferences, and even our weekly calls. Lo and behold, his workmanship plummeted and the project was projecting grossly beyond schedule. We tried to work with him, bring in extra help, and figure ways to finish up the project. Still more issues. We contacted our lawyer, and kicked him off the project.

As recourse, the contractor filed a mechanics lien on the property for a value well beyond the remaining amount of the contract, and the house is far from finished. Our lawyer has given us a number of suggestions to avoid court and unload the property as quickly as possible. One option is by using an insurance bond or surety bond, both of which set money aside to account for the lien amount and get the lien off the title. Now, the contractor does not necessarily get the money, but has to pursue it, and still allows us to sell the property. Obviously, if we can convince him to remove the lien, then that is our best option, but we would like to explore our other options too.

My questions are:

1. For anyone who has been through a similar circumstance, do you have any hindsight advice or suggestions?

2. Does anyone have any recommendations for insurance bond or surety bond providers in the Denver area?

Thank you all so much for your contribution to the BP community. I hope that my experience here is a learning opportunity for others than just myself and my partners :)

Steven

I'm in the same situation in Chicago. Do you have signed lien waivers for each payment? I do, and I'm hoping that protects me against the contractor filing a lien, or getting anywhere with it. I'm talking to my lawyer tomorrow.

@Travis Sperr might have some suggestions for the insurance bond or surety bond. Your title company might also have some ideas as well. If you are using a big title company you might have to dig a bit to find the right person who even knows what you are talking about. 

The path I have hears is that you escrow the amount in question at the closing. That would save you the cost of a bond or insurance. I'm sure the bonding company or insurance company would want something similar as well. 

Bonding it off is the way to go, you can usually put up your own cash in lieu of the bond if you want.  Shaky contractors try to use the lien as a club.  Once they realize they haven't stopped your sale they very rarely will follow through.  Your attorney can tell you, but here if you contest the lien it shortens their time to file suit before the lien expires.

@Blake F. , our contract states that he was to submit lien wavers from each of his subs, but we did not see any of those, and highly doubt he obtained them since he began advising his unpaid subs to file liens as well. But they should help you in your case! Granted, a contractor can file a lien with little effort or money, even if they know it's frivolous/spurious, and then force you to take action or wait until it expires. I pray that your contractor decides not to file a lien; it's just a pain in the neck to deal with!

@Bill S. , we have looked into the surety bond and came up empty. The bond agencies I spoke to claimed that the bond was really more suited for the contractor than the property owner, and that it all the contractor would have to do is validate their claim on that bond. One agency rep said that validation could be as simple as the contractor providing a copy of the lien to the surety.

As for the escrow option, we are pursuing that now. The benefit is that we can still sell the home, use sale proceeds to fund the escrow account, and make the choice to either 1) wait until the lien expires to get our money back or 2) file an "Order to Show Cause" (hearing with a judge) to get it the lien dismissed. As odd as it sounds, we are fortunate that he filed the lien for an amount that would require him to file with Colorado district court for him to pursue, which will cost him $10K-$15K in attorney fees to do.

@Wayne Brooks , see my response to Bill about the bond option. I agree that he is likely using the lien more to cause problems than to actually pursue the lien amount. 

Our strategy currently is to serve him with a small claims summons and demand he remove the lien. If he does, we can move forward. If he does not, we can threaten to escalate to county (higher damages allowance and power to dismiss the lien), pursue the order to show cause route, or use the escrow method to allow us to sell the home.

Thank you all for your thoughts and feedback! 

Yup this sucks - the worst part about these situations is that the contractor has all of the leverage. I am not sure that I agree with your attorneys advice (assuming he is a RE and not the guy that made your estate plan). If your contractor has provided the intent to lien the property you can't sign the affidavit at the closing conveying clean title.

If I had your shoes on I am first going through the contract with a fine tooth comb to find where you are protected - if it was his contract you likley are not - but never know how savvy the fella is.

Next if you are not complete i would give him proper notice (according to the contract and/or state law if applicable). Hire someone else to complete the project and move as you would. The lien if placed will stay on the property, but the title company will almost always allow you to resell the property as long as you escrow 150% of the lien amount. So the lien won't stop you from selling the property will just tie your money up. At that point I am going after him guns blazing - most contractors don't understand the escrow and will think when you sold the house they lost out, if he is represented that changes. Check with title but I believe once a mechanics lien is placed they have 6 mos to collect and release or move forward with a foreclosure (extremely unlikely unless he has significant financial resources). At the expiration you would get you money back - double check with title.

ultimately you will likley settle with him and pay more money that you feel he is due and less than he feels like he deserves. And from this point forward will have your guard up so high you will never go through this again. 

You mentioned you are in a partnership - make sure everyone is on the same page and has the resources to get through this.

You asked for hindsight advice - looks like you did it all right - my guess is that you may not have known all the right questions to ask and/or couldn't read through his BS. Also I didn't see that you asked for and called references or got multiple bids. 

Good Luck!

@Travis Sperr , thanks for your feedback! Our attorney is an RE Attorney, and has dealt with mechanic's liens on properties for other clients in the past. It was our contract which helps us and we've all reviewed many times...and then once more :)

Since I first opened up this discussion, a few things have changed. We are now pursuing the escrow option and determining the required details with the title company to make it happen. Our backup option is to get the lien dismiss through an "order to show cause" (hearing) with a judge.  

Agreed on keeping our guard up...will do! And yes, that is very important in a partnership, and we have all been on the same page prior to making any big decisions.

My honest opinion is that the contractor hadn't handled a project this large (around $80K - although he claimed to have), and schedule as well as material costs took him for a ride he wasn't expecting. Unfortunately, had he told us, we would have been willing to work with him.

Thanks for the thoughts!

@Wayne Brooks

@Bill S.

I am in the same situation to the T except for that the person I had organizing and working on the flip did not have any license during the projects we have done, but now has a handyman's license, and also, there are no contracts, only bids, with no signatures by either party. There is also work that he is claiming that was either done badly, or that he did not do at all ex: hanging lights, and roof done ended up leaking. I am glad I know about the escrow option, but am looking for future insight as I have read that in some states, with no license, you can claim all work done by the person with no license, and make him give you all money back. Let me know if I should make a new post.

@Steven Norton , please keep posted how this turns out for you.