Can a contractors lien cause a house to go to foreclosure auction?

Is it possible for a contractors lien to cause a house to go to foreclosure auction? This question is answered in detail here.

Can a Contractor’s Lien Cause a Foreclosure?

The answer is no. A contractors lien cannot by itself cause a house to go into foreclosure.

A contractor can put a lien on a house for an unpaid debt by obtaining a lien judgement from a court. The contractor can then record it with the county recorder so it attaches to the title of the house. The homeowner will then be responsible for paying the debt.

Depending on the laws within your state, a contractors lien will have an allotted time that it will be attached to the property’s title. If the homeowner does not pay the lien, he or she will be prevented from selling the house with a clear title. After the lien expires, the contractor has the option to renew it through another court judgment.

If the house is sold while the lien is attached, the purchaser must buy it subject to the contractors lien and take on the debt. Otherwise, clean title cannot pass to the new owner.

What Kinds of Liens are There?

A lien is a financial claim put against a property that inhibits the sale until it is paid. There are two subcategories of liens, one being a voluntary lien and the other being involuntary.

A voluntary lien (like a mortgage) is a financial claim entered into voluntarily by the purchaser as a way of paying for the home over time.

An involuntary lien (like a mechanics or contractors lien) is put on the property by another party aside from the owner. In involuntary lien obligates the owner to settle the unpaid debt before the property is transferred to a different owner.

Additional types of liens, such as tax liens or judgment liens, can be placed on home. For example:

  • The IRS can levy a tax lien against an owner’s property for failure to pay income taxes
  • The county can levy a tax lien against an owner’s house for failure to pay property taxes
  • A judgment lien can be put on a property if the owner has been sued and lost, and is unable to pay the judgement amount.  
  • A judgment lien can also be related to unpaid child support or an automobile accident lawsuit.

How to Find Contractors Liens on a Flip House?

A contractors lien can be found on the title of the property. Recorded contractors liens are found by doing a title search.

A contractor may obtain a lien against the property, but not record it. In most jurisdictions the lien is still valid, even if the contractor does not record it. Contractors often don’t record liens because it entails extra legal expense.

One tactic faced by house flippers involves the contractor intentionally waiting to record their lien until the last moment. They will record it right before the property is sold, or during the escrow period. The intent is to get the new owner to assume the lien obligation and make payment.

This is common in states that require non-refundable deposits to enter escrow. The buyer is essentially trapped into paying the liens. Or the buyer must sue the seller (who often has no money) to recover later.

To discover unrecorded contractors liens requires researching the local court records in the jurisdiction where the property is located. This goes beyond a simple title search, and entails extra time and cost. However, it is essential to find any unrecorded liens if you’re buying a house to flip. Otherwise you may face a number of contractors demanding payment soon after you take possession of the house.

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More Information on Contractors Liens for House Flippers

How Contractors Get a Lien

If a contractor performs services to a homeowner and is not paid for the work, the contractor may put a contractors lien (aka mechanics lien or construction lien) against the property. This lien can inhibit the sale of the property until it is paid.

In order for contractors to obtain a lien they need to provide the written contract referring to the services being performed, the nature of the working being done, the materials required, and the agreed upon price for the services.

Depending on the state, the contractor may be required to inform the property owner that they are going to file a lien against them before doing so.

Subcontractors Can Also Get Liens on a House

A common situation is when the homeowner pays the contractor, who then farms out the work to a number of subcontractors. If the main contractor fails to pay one or more subcontractors, these subcontractors may have the ability to file a lien against the homeowner’s property they worked on.

The owner may have paid the contractor in full, yet be innocent and not know about the contractor’s failure to pay its subcontractors. Homeowners rarely know that they should demand proof that the contractor has paid its subcontractors before paying.

Avoiding Contractor Lien Issues When Flipping Houses

As an investor looking to buy and flip a house, you need to know your real estate laws. You must also thoroughly research the house’s title and any judicial records to uncover both recorded liens and unrecorded contractor lien judgements. The last thing you want is to invest in a property, only to discover it comes with multiple unpaid contractors liens that appear suddenly out of the woodwork.

This post has answered the question of whether a contractors lien cause a house to go to foreclosure auction, along with additional information to help house flippers avoid issues with contractors liens.

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