Definition
A Mechanic’s Lien is a legal claim filed against a property by contractors, subcontractors, or material suppliers who have not been paid for work performed or materials provided.
It attaches to the property itself, not just the owner, and can prevent sale or refinancing until resolved.
Who Can File One?
- General contractors
- Subcontractors
- Material suppliers
- Laborers (depending on state law)
How It Works
- Work or materials are provided.
- Payment is not made within required timeframe.
- Contractor files lien in public records.
- Owner must satisfy, bond around, or legally contest the lien.
Why It Matters to Investors
- Clouded title: Can delay closing or refinancing.
- Lender risk: Construction lenders monitor lien filings closely.
- Cash flow disruption: May require immediate settlement.
- Legal exposure: Potential foreclosure action by lienholder.
Priority & Risk
In some jurisdictions, mechanic’s liens may have priority over certain other claims depending on when work commenced. This can create risk for lenders and equity investors.
Example
A property owner hires a contractor for $500,000 in renovations. The owner fails to pay the final $75,000. The contractor files a mechanic’s lien, which must be resolved before the property can be sold.
How to Prevent Mechanic’s Liens
- Use lien waivers with each payment
- Verify subcontractor payments
- Maintain proper documentation
- Use construction escrow or draw processes
Common Pitfalls
- Ignoring lien notices
- Failing to collect signed lien waivers
- Assuming general contractor paid subs
- Overlooking state-specific deadlines