Do mechanic’s liens kill real estate deals?

On Behalf of | Sep 16, 2021 | Real Estate Transactions | 0 comments

Many have heard the term “mechanic’s lien,” but you may not understand what they are and how they work until encountering one during a real estate transaction. In broad terms, a mechanic’s lien is a legal claim filed against a property by a lienor for unpaid bills. If there is a lien, the property owner cannot sell until resolving the lien.

Why are there mechanic’s liens?

Subcontractors or suppliers often file liens because the owner owes the lienor money for services rendered. The payment dispute need not be because the owner did not pay – it could happen because a contractor hired a subcontractor but did not pay them. It also may be because there was a dispute over the quality of the product or work.

If the owner does not admit to or know about (which is unlikely) the lien, the potential buyer will find out about the lien when they do a title search to confirm the current ownership of a property and that the title is clear.

How to get rid of it

Property owners are typically motivated by a potential sale to the lien released, but a buyer sensing an opportunity may also get involved. Common ways to resolve the matter are:

  • Negotiate: It is often best to negotiate directly with the lienor or pay them off regardless of who is owed money to have the lien released.
  • Lien discharge bond: This is more complex, but the owner can purchase a lien discharge bond from an insurance company. The lien then gets attached to the bond.
  • Filing an appeal: This involves the lienor and contractor/owner going to court to resolve the matter. It can be expensive and likely takes more time.

Caution is the key

While the property owner may be innocent of wrongdoing, it is still wise to be careful when purchasing property with a lien against it. The purchase agreement will need a stated outcome and an agreed-upon price, and other specifics will need to be addressed. A valid contract can hold the deal in place while the details of the lien are worked out.