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ACT Contractors Forms... From The Paper Side of Contracting.

Contractor Forms: Mechanics Lien Strategy for Dummies

Posted by Bill Baird on Thu, Mar 10, 2011 @ 21:03 PM

Collecting money owed a contractorMost contractors view filing a mechanic's lien as the last resort.... you know... "GOING LEGAL!" But you know what?  The mechanic’s lien process doesn't have to be the last resort and it most definitely does not have to mean "going legal." Let’s talk mechanic’s lien strategy.

In all my years as a contractor with thousands of home improvement customers there has never been one single time that I filed a CA mechanic’s lien form (believe me I’ve filed plenty) and felt completely satisfied with the outcome. There was always something that cropped up to "rain on my parade."

Sometimes the court would reduce the lien amount in an effort to make both parties "equally unhappy" rather than one party a winner and the other a loser... you know the "share the pain" philosophy. That's a tough one to swallow… you have to settle for less than your righteous indignation tells you is your due.

Sometimes the property already had so many claims that by the time everyone was paid out of a foreclosure sale my claim at the bottom of a very long list was worthless. The money would have run out long before it was my turn to be paid so I could not even get my legal fees back if I sued!
Once, long ago, when I first started out as a contractor, I filed the lien, got a judgment for the FULL amount (over 40K in 1981 dollars), went to foreclose on the new condo development, then found out that during the course of my time in the world of the courts, lawyers, and the law in general, the property had been sold and my judgment was set aside??? How could this be you ask?  I’ll answer that one in my later post in this series about the LIS PENDENS … say those words 10 times and NEVER FORGET THEM!     LIS PENDENS…. LIS PENDENS…

The whole point of all this is that the time to decide just how far you will push the collection process is BEFORE you decide to file that mechanic’s lien. 

Do Your Research! Here are some points to remember:

  1. Have a title search done on the property (that is what a title company does) to see just what is owed, and to whom, against the property. You will also get important information on the property like the legal description which you will need. This is money well spent and this information is public record.

  2. Find out what the property would reasonably sell for if foreclosure happens. Make sure there is money there to pay you! Remember, your claim will be at the bottom of the "list" of existing lien holders and others who have secured loans by trust deeds so make sure after everyone is paid... there is enough left for YOU!

  3. Make sure this is not a “throw away” property that the owner does not have a problem with losing!

Armed with this information your next decision is just how far to go in the collection and mechanic’s lien process. Mechanic’s liens expire or as the attorneys say “become stale” after a certain time period… you can’t place a lien on the property forever and you can’t place the same lien again after it becomes stale!  In California, for example, a mechanic’s lien is “good” for 90 days. You have 90 days to file a lawsuit.  Once a lawsuit is filed the mechanic’s lien will remain in effect until the lawsuit is decided in court. This timeline varies from state to state but in California, you generally have 90 days after a mechanic’s lien is filed to decide if the circumstances are worth the expense of a lawsuit.  So, you ask, in many cases why bother with a mechanic’s lien?

Filing a mechanic’s lien in most states is easy to do and makes sense in many cases regardless of whether you plan on pursuing a lawsuit to foreclose or not.  Why... because mechanic’s liens RARELY go to a lawsuit unless other issues are involved such as a claim of poor workmanship. Would you want to lose a valuable property to foreclosure if there was another way?  Of course not and so it goes in most cases.  When the mechanic’s lien is filed, the property owner is usually eager to resolve the issue without adding legal fees to the money that is already owed.

NEGOTIATED SETTLEMENTS WORK! ... There are usually three reasons your customer is not paying.

  1. You are billing for things they did not agree upon in writing like verbal changes or extras. You blew it here by not getting extras and changes signed for so negotiate you’re a** off here since you will probably not prevail in court and something is better than nothing.

  2. They feel your work is bad and you either deny this without giving them an acceptable reason or they no longer have confidence in your taking care of the problem(s).  You blew it here by not taking care of “business” by allowing little problems to become one big problem so negotiate you’re a** off here also ... sometimes getting a friendly third party contractor here to take care of your real or customer perceived problems can be the answer. The judge is not an expert in construction but he is a consumer so arguments that things are really ok when the customer says they aren’t usually backfire.

  3. They do not have the money to pay you. This is the big one and all other reasons the customer gives you for not paying are many times just excuses for the fact that there is no more money.  You can offer a settlement for less, which I do not recommend, or…. Ask the customer to sign a trust deed for the amount they owe, add the maximum legal interest, and set up a payment schedule they can afford.  Sure, it may take years to get paid but a trust dead does not expire like a mechanics lien and it is secured by the property.  I did a job for a homeowner in 1982.  The fellow lost his job and did not have the money to pay me.  This was a $3,000 job that I took a trust dead on at the advice of my father who was a contractor for 50 years. Just a few payments were made but the trust dead remained in effect. A few years back this fellow died and a few years after that his wife died… guess what… the executor of his estate paid almost 25 years of interest on that $3,000 so the home could be sold by the fellow’s children who inherited it. I got a check for almost $35K. While this is out of the ordinary, the point is that taking a secured trust deed when the money “well” dries up is a great alternative to “going legal” and possibly spending money to get nothing.

The best reason to use a mechanics lien is to provide a reason for your customer to WANT TO NEGOTIATE with you to avoid the alternative… even if you don’t plan on going to court for foreclosure proceedings … in most cases, your customer doesn’t know that! 

Topics: CA mechanics lien form, mechanics lien, collecting construction receivables

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