When hiring a contractor to work on that dream addition to your home, chances are good you will (and should) sign a contract. A good contract will ensure that your rights are protected - that the contractor will show up and do the work you want within the time frame you request. But you should know that such documents also give the contractor certain rights, and in some cases, may even allow the contractor to take your home should you fail to pay up!
A contractor's legal right in your property is referred to as a mechanic's lien. A "lien" is the legal term for the right a creditor has in a borrower's property. A mechanic's lien is a specific type that is created by law to protect contractors, home-repair people, and home building supply people. Other types of workers who may be eligible to receive a mechanic's lien include subcontractors (the crew hired by your general contractors), electricians, architects, lumber yards, and plumbers.
Although mechanic's liens vary by state, they usually allow the protected individuals to jump to the front of the line should your creditors have to go to court to get payment on a failed project.
Let's look at an example to see how mechanic's liens usually work. Say you are expecting a new baby. Given the current real estate market, you don't think you will be able to sell your home, but you desperately need more space for your growing family. So, you hire Sam, a general contractor, to add an extra room above your garage. As part of the contract you and Sam sign, Sam is given a mechanic's lien in your home. (Sam will have to follow the necessary state requirements to "perfect" the lien, which may require filing a form with the county recorder or office that maintains real property records, and giving you notice of the lien and of commencement of work.) Sam's rights in your property are now similar to a mortgage holder. If Sam finishes the job, and you pay as required, Sam must clear the title on your home, meaning that he must release the lien. However, if you fail to pay Sam what he is owed, he could go to court. There, in an extreme case, Sam could ask the court to order a forced sale of your home in order to satisfy the debts you owe him.
You must understand the rights that contractors and others you hire might have in your property by virtue of a mechanic's lien.
Mechanic's liens aren't necessarily called by that name; in some states or areas, they may be called construction liens, materialman's liens, or supplier's liens. It is also important to note that in some cases, they don't always apply to real property (the legal term for real estate, i.e., your home). Rather, in some cases such liens can apply to personal property (the legal term describing everything you own that isn't real estate). For example, the repair person you hire to fix your oven may be able to take out a mechanic's lien interest in that same oven.
Chances are excellent that when you start a home-construction project, you will have every intention of paying your contractors. However, in these tough financial times, it is important to realize that all may not always go as planned. Consequently, you must understand the rights that contractors and others you hire might have to your property by virtue of a mechanic's lien. When signing a contract with a contractor, like any other contract, make sure you understand each clause; when in doubt, ask for clarification or talk to your lawyer.