Category: Asset Protection Articles

How to Minimize The Risk of a Lien

4Do you think rehabbers are the only ones at risk of getting a Mechanics Lien filed on their properties…think twice! To a degree or another, as long as you are a real estate investor you are at risk. Unless you never require anybody to do any work on a property and you do not own real estate you are not safe.

There is a lot of talk about the importance of asset protection, should I incorporate, should I use a Land Trust when acquiring properties, which business entity is better? Further, the appropriate type of insurance and the appropriate amount of coverage is crucial to mitigate or minimize loss. The truth is that you must do your homework on all the asset protection aspects that relate to your business…

Even though all the aforementioned issues are important, in the litigious business environment we evolve, it is crucial to pay special attention to the written documents we live by. I cannot stress the importance of having your attorney or a season fellow investor look over your documents when starting as a real estate investor. The legal documents you draft, whether to close on a deal and specially if having a contractor or any handy man for that matter do work on your properties, are part of your protection or shield against a possible enforceable lien.

For a matter of simplicity I will only cover some of the key clauses or crucial waivers you should include on your contract when dealing with contractors. Nonetheless, before you even hire a contractor read the property code of your respective state to familiarize yourself with your rights as a consumer. Further, make sure the contractor is insured and bonded. When I hire a new contractor these are some of the things I pay close attention to:

Check…

  • References to make sure the contractor is reliable and does good work.
  • Your local BBB office to make sure there are no complaints.
  • Your state Residential Construction Commission if any for complaints.

Make sure your…

  • Contract has a start date, due date and a default date if unforeseeable delays occur.
  • Your contract has a retainage clause.
  • Contract has a penalty clause with a penalty fee for every day the contractor is late.
  • Contract has a liability waiver in the event the contractor leaves tools and materials on site and they get stolen.
  • Contract includes a lien waiver in the event the contractor does not comply with the contract and you do not pay the contractor for work not performed or not performed to specifications and satisfaction.
  • Your procedure includes a punch list and a job walk before remitting payment.
  • Last but not least make sure your have the contractor sign a Worker’s Comp. waiver if they do not have Worker’s Comp. insurance.

If you follow these steps you will not go wrong and will minimize your liability exposure. Most important after the work is done to specification and your satisfaction make the contractor sign a Mechanics Lien Release, where it specifies that the contractor has been paid in full and that he/she waives any rights to file lien on your property.

Motivation determines what you do… Attitude determines how well you do it. (Unknown author)
An obstacle is something you see when you take your eyes off the goal (Unknown author)

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Builders Risk Insurance

Builder’s Risk insurance is a property policy designed to provide coverage for property while under construction. It covers the contractor’s interest in materials at the job site before they are installed, materials in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner.

Disclosure: This information is provided for general purposes only, and it is not intended to be an advice nor the norm. For accurate information suited to your situation, you must contact an insurance agent or a property and casualty risk manager.

construction3I hope the following information will help you. It will provide generalities of coverages provided by a Builders Risk policy. Please keep in mind that policies will very depending on the state and the carrier for each carrier has specific proprietary products.

In general, Builders Risk covers property and it is particularly designed for construction projects, unlike policies for vacant homes or homeowner policies. Further, unlike other home policies, it does not provide liability coverage, unless a specially designed product by XYZ carrier.

Liability coverage is separate. It can be part of a package policy, an endorsement, or a stand-alone policy. In any event, if you are in this business you should have some form of liability coverage, whether through a business or personal policy. Always, check with your contractor if they have insurance and what type of insurance.

I always have my contractors sign waivers regarding Worker’s Compensation and materials (I am not responsible for their loses) Moreover, check with your agent what the underwriting guidelines are for the specific carrier. There are some carriers that do not insure the property if undergoing major structural changes, especially foundation work. Builders Risk Insurance covers or protects against loss to buildings or structures in the course of construction, including materials incidental to construction.

Builders Risk insurance is a property policy designed to provide coverage for property while under construction. It covers the contractor’s interest in materials at the job site before they are installed, materials in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner. The policy may be written to cover the whole structure for new construction or rehabilitation projects. It can also be used to cover specific projects such as a new room addition, a deck, or a remodeled kitchen.

  • The policy is flexible enough to be used either for a one-building project or on an ongoing reporting basis for a project, which includes multiple buildings (check with your agent).
  • The policy includes coverage for soft costs, such as additional property taxes, and interest costs, which result from a loss.

The following coverages might be included at no additional cost or they might be endorsements depending on the insurance carrier:

  • The loss of business income
  • The cost of replacing lawns, trees, shrubs and plants
  • The cost of replacing specifications, plans and blueprints
  • The cost of removing debris of covered property after a loss
  • The loss of property in transit to the construction site
  • The loss of property at a temporary storage site

Within the limits of insurance stated in the policy, coverage includes any increase for loss resulting from any law or building ordinance-regulating repair or construction.

  • The policy covers theft of building materials at the job site.
  • Damage to glass is covered – including damage caused by vandalism.
  • Losses will be paid based on what it would cost to repair or replace the damaged property with property of like kind, quality, and use.
  • Coverage does not cease until the property is sold or accepted as complete by the purchaser, or the policy expires, whichever occurs first. Coverage ceases immediately if the policy is canceled.
  • Coverage for the contents of model homes can be added to the policy for an additional premium.

I hope this helps!

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