This is a cautionary tale of home buying and what your clients need to be aware of to avoid a similar fate.
In the village of Menomonee Falls, Wisconsin, first-time buyers, Kayla Lyons and her fiance, were settling into their new home when she found a handwritten note on her door. She was startled to learn that a contractor was threatening to put a lien on her home for work he did for the previous owner. $27,000 is the amount he claims that is owed to him, and Lyons and her fiance are now stuck in the middle waiting to see what the courts will say.
A contractor’s lien, sometimes referred to as a mechanic’s lien or a construction lien, must be paid before a transfer of the property title. The title company will conduct a title search on the property for any defects like a lien and require it to be paid by the seller before moving to the closing table. This is where the situation gets sticky for Lyons and her fiance. The contractor says he is within the time frame to file this lien while the previous owner claims that he didn’t do the work — but still paid him for it. Unfortunately, the lien was filed after closing.
Here are four tips for homebuyers to avoid a surprise mechanic’s lien after closing.
In most states, a contractor has anywhere from 90 days to 6 months to file a lien against a property for unpaid work regardless of the owners’ relationship to the contractor. What can a homebuyer and their title agent do to make sure they won’t get caught in the crosshairs of a mechanic’s lien like this?
- Get a lien waiver signed by the contractors.
- Ask for receipts from the current homeowner.
- Obtain a Municipal Lien Search with a permit history of the property.
- Always get title insurance.
1. Get a lien waiver signed by the contractors.
For current owners, always get a lien waiver signed by the contractors involved in the remodeling project whether you intend to sell the property or not. This will protect your home in the future and make sure there are no encumbrances on your title. Any defect or lien will have to be cleared if you want to sell the home in the future. Most mechanic’s liens occur as a result of subcontractors not being paid by the general contractor.
2. Ask for receipts from the current homeowner.
If the home has been remodeled, potential buyers should ask for copies of the receipts. When buying a house with any updates, be sure to inquire about the contractors and permits involved in the project. Ask the current owner if they have a lien waiver from the contractors. Mechanic’s liens are especially tricky because they can be filed several months after materials were purchases and work was completed. The lien may still be filed after closing, so new owners could end up in the middle of a money dispute that threatens their claim to their title if they aren’t careful.
3. Obtain a Municipal Lien Search with a permit history of the property.
Obtaining a complete permit history from the municipality will give buyers an idea of when work was initiated and completed. While the title insurance company will search the county clerk for any recorded liens, there are some documents held within a municipality’s records that aren’t publicly filed. For instance, while a contractor’s lien will be recorded, the permits that were pulled by the contractor might not be listed in the county clerk. Often times, a special request must be made to the municipality’s building department for the permitting history. Lyons and her fiance were unfortunate to buy their home during the “gap” period between the initial public search by the title company and the filing of the contractor’s lien.
A Municipal Lien Search with the city or county will usually reveal the full permit history of the property, who the contractor was, and when the work was completed and passed inspection. The contractor information should match the owner’s lien waiver.
Additionally, a permit search will show if there are any open or expired permits with fees on the property. Some municipalities will also conduct a building code inspection to give new owner’s peace of mind that there are absolutely no issues or outstanding building code violations on the property. This information is not typically recorded with the county clerk, but a new owner could still be held liable for the unfinished work and fees from a previous owner.
4. Always get title insurance.
The title company that Kayla Lyons hired asked all the right questions and performed proper real estate due diligence according to Wisconsin’s laws. The previous owner signed a legal document stating that all contractors were paid for any work done, but did not turn over any lien waivers. If the title company had obtained a permit history, they would have discovered before closing that the previous owner did indeed have work done within that time frame. The permitting documents clearly show that the contractor filing the lien was named on the pulled permit with the municipality. Getting a lien waiver from the appropriate contractor would have prevented this new homeowner nightmare completely, but at least with the signed legal documents from the past owner, Lyons and her fiance have a much stronger defense in refusing to pay the lien.
Kayla Lyons and her fiance are in an unfortunate and uncommon situation. Hopefully, the results will be in their favor and the contractor will recoup his money from the previous owner, but this is a good example of how state standards aren’t always enough. Going above and beyond the typical real estate due diligence will mean the homebuyer is protected and the title company’s reputation remains impeccable.
Want to learn more about how municipal lien searches can help you at closing? Download The Top 5 Common Misconceptions about Lien Searches.