Mechanics Lien - Tax Lien

What Is A Mechanic’S Lien?

Mechanic's Liens are a legal way to help vendors and laborers ensure that they will eventually receive payment for their services from the property owner. This is especially important for large-scale construction projects that may cost thousands (or hundreds of thousands of dollars), in associated building and labor costs which may not be covered with standard deposits charged to commence work.

Construction costs can be high. It is not uncommon for large-scale projects to go over budget, forcing homeowner's and real estate investors to delay making final payments to contractors, subcontractors, day laborers, electricians, plumbers, vendors and others who have worked on the job. Since it is virtually impossible for contractors to "repossess" their services after the work has been completed, it is important to have safeguards in place to recoup losses in the event of nonpayment. A mechanic's lien is just that safeguard.

When first introduced, mechanic's liens were a way for a service provider to ensure payment when rendering service on a car or home. For instance, if a mechanic performed automotive repairs and wasn't paid, they could put a lien on the owner's car, which held the title in a type of limbo until the debt was paid in full.

With the high costs of construction often causing cash-strapped property owners to delay paying their construction bills on time (if at all), the mechanic's lien is a way for workers to ensure that the won't be ripped off by unscrupulous property owners that have no intention of paying for work completed from the beginning.

When a property owner fails to pay for services rendered, the contractor (either alone, or in conjunction with a group of subcontractors and vendors), may send a 20-day notice to the project owner, informing them that a mechanic's lien will be issued if payment in full is not received by a specified date. This date is generally determined by the individual state's mechanic's lien laws.

Once the initial deadline has passed, the contractor is free to file a formal mechanic's lien on the property. When a mechanic's lien is placed on a property, it guarantees that the debt will be paid first in the event the property is sold in the future - either by the owner, or a third-party mortgage company, or tax service. This can severely restrict what an owner can do with the property until the debt is paid. For instance, many lenders will refuse future financing (mortgages, lines of credit, home equity loans, etc.), while any liens remain on the property. In the event the property is sold (either on the open market, or by auction), the lien holder is guaranteed payment before the title is released to the new owner.

Filing a mechanic's lien in no way ensures that a vendor will be paid. After all, a property can contain an unlimited amount of liens, and if a multi-liened property is sold by the holder's mortgage company or the local taxing authority for back taxes, the liens are, in some cases, paid off in the order in which they are filed, and when the money runs out, other lien holders remain unpaid. Some states, however, do require all outstanding debt be assumed by the new property owner, which ensures it will be paid at the time of sale. Either way, it does prevent the current property owner from making a profit on the property without first paying back old debt.