How to Minimize The Risk of a Lien
Do 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:
- 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.
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