Filing a mechanics lien is the best way to cut down the amount of time it takes to get paid in construction. But, occasionally, getting paid requires a bit more muscle. Contractors might have to foreclose on their lien in order to recover their money. The good news is, a lien foreclosure is relatively rare.
However, since they’re so uncommon, there’s a lot of mystery surrounding the actual lien foreclosure process. This article will help clear up some of the foggier details about foreclosing on a lien, so you’ll know what to expect.
When would you foreclose on a mechanics lien?
Unfortunately, sometimes filing a lien is not enough, and there are several reasons why that could be the case. The property owner might be completely upside down financially, and they simply can’t make the payment. In other cases, they may feel that your mechanics lien has no merit, so they want to try their hand in court.
In either case, some circumstances require contractors to start the lien foreclosure process. But what exactly does that mean?
When you foreclose on a lien, you’re filing a lawsuit to force the sale of the property in question. The property goes up for auction, and proceeds go towards satisfying the liens.
Note the above “liens,” as in more than one. That’s an important distinction — and you’ll see why later.
The timeframe for lien foreclosure
Filing a lien foreclosure lawsuit can be a bit of a balancing act when it comes to the calendar. You can accidentally wait too long — or you could jump the gun.
Every state has a deadline for when you need to file your lien, but they also have deadlines by which you need to “enforce” or foreclose upon your lien. Waiting beyond that deadline will cancel the lien, and the property will be free-and-clear from your claim.
Don’t foreclose too soon, though. There aren’t any set requirements for waiting, but if you foreclose right away, you aren’t giving the owner the opportunity to make good on the amount they owe you.
Plus, you have to hire a lawyer for your lawsuit, which can make filing too soon an expensive decision.
How to foreclose on a mechanics lien
The process of a lien foreclosure can be complicated, and it’s best to navigate it with a roadmap. This is a breakdown of the steps involved in foreclosing on a lien.
1. File a mechanics lien
Filing a mechanics lien is the actual first step in the lien foreclosure process. After all, you can’t foreclose upon a lien that doesn’t exist.
Be sure to know and understand the guidelines in your state for filing a mechanics lien. There are certain rules you need to follow to protect your payments. Missing one of those critical factors could forfeit a portion of your payment — or worse, the entire thing.
2. Send notices
After filing a mechanics lien, a bit of time might go by before you hear anything. Often, the property owner, general contractor, or a representative of theirs (possibly an attorney) will reach out to you to try and make things right. That’s a win.
But if time goes by and you’re experiencing radio silence, it might be time to send a Notice of Intent to Foreclose. This notice can serve as a warning shot to let the owner or GC know you’re ready to foreclose on the lien.
Some states require a Notice of Intent to Foreclose in order to foreclose on a lien, while others don’t. Regardless of the requirement, it’s a good habit to get into. You might find that this notice is all it takes to get the ball rolling, and it could save you a lot of time, money, and headaches.
It’s a good idea to send a foreclosure notice to the owner(s), GC, and the bank financing the project — be sure to find that information out when the project starts, not when you need it.
3. Hire a lawyer
Foreclosing on a lien is a lawsuit, and it’s not something that you should pursue on your own — unless you moonlight as a lawyer. But, you do have the right to represent yourself in most jurisdictions, if you feel so inclined.
A lawyer isn’t going to take your lien case for free. Most often, they’ll require a retainer — essentially a down payment — and for you to sign a fee agreement. This agreement will spell out how much they’re charging you for their efforts, as well as a payment schedule.
The point is: You’re probably going to have to come up with upfront cash to secure a lawyer.
4. Prepare your case
Once you hire a lawyer, it’s their job to prepare the case for court. However, you’re going to have to help them.
Your lawyer will want all of the documentation you have from the start of the project. This includes documents like bids, signed contracts, preliminary notices, payment applications, payment records, payment reminders, as well as your lien documents.
Your lawyer might also find it helpful if you supply pictures that clearly show your progress on the project, as well as any damages or issues that the owner could be claiming to hold up payment.
5. File your case
This next step is more your lawyer’s job than your own, but you should know about it because it does take time and money.
Once your case is ready to go, your lawyer will file it with the appropriate court, and there are fees involved. In most cases, these fees come out of the retainer you paid in Step 3. It’s important to understand that fees vary from court to court, and they could be substantial. If the fees wipe out your retainer fund, your lawyer might require you to replenish it.
6. Serve the owners
With your court case filed with the appropriate courts, you’re ready to serve your lawsuit upon the property owner.
To serve a lawsuit legally, it needs to be in person and handed directly to the defendant. You can’t just leave it under their windshield wiper in a parking lot or stuff it through the mail slot in their front door.
There’s a good chance that the relationship has become a bit contentious at this point, so you’re not legally allowed to serve papers for a lawsuit to which you’re a party. Your lawyer can help you choose a courier that will serve the papers for you, allowing you to avoid an argument while also adding third-party accountability to the equation.
Be sure to serve all of the owners. If there’s more than one owner involved — a silent partner, even — neglecting to serve them could hold up your case.
If your third-party service cannot find the parties involved despite their best efforts, there is a chance that the court will allow you to post a notice in a newspaper. But, that could be on a case-by-case basis.
7. Wait for your day in court
Once you serve the defendant in your court case, it’s a waiting game. Courts are notoriously slow, and recent shutdowns have them even further behind than usual. It’s hard to be patient when your business’s bottom line depends on this case, but do your best to exercise patience.
Some states allow you to include fees for your lawyer, as well as interest on the past due amounts, which should help recoup some of the cash spent on credit interest and legal consultations during a long holding-pattern.
You might even find that this is the point where the owner starts communicating. It’s entirely possible to settle out of court, which could be in your best interest in some scenarios.
8. Collect on your judgment
Once you have your day in court and emerge victoriously, your next task is collecting on the judgment. If you thought you walk out of the courtroom with a check or a briefcase full of crisp hundred dollar bills, you’ve got another thing coming.
Collecting on your judgment can be just as challenging to navigate as the foreclosure process, and the step-by-step breakdown is beyond the scope of this article. But, know that there’s a chance that the debtor won’t just hand over the judgment money, in which case you might enlist the help of a collection expert.
Things to consider before foreclosing on a lien
There are some things you need to consider before you foreclose on a lien: Is filing a foreclosure lawsuit worth your time, money, and effort? You need to make sure the juice is worth the squeeze — and here are some factors that can help you determine that.
The amount owed to you
You need to consider how much money the property owner owes you. Filing a lawsuit is expensive, and even though most courts will award the legal fees to the winner in lien judgments, that only helps if you win. Remember: If you lose, the lawyer and court fees are on you.
Even if your case is a lock, you need to consider how much money is at stake. If it’s only a few thousand dollars, you might find that the time and energy aren’t worth the cash. Instead, writing off the bad debt could be the better option.
The equity in the property
Do you remember when I mentioned that selling the property will satisfy the liens? The equity is where that becomes a factor.
Most property owners carry mortgages. That mortgage is technically a lien, and in most cases, the “first in time, first in right” standard applies. That means the mortgage company will take their share of the sale proceeds to satisfy the original lien before you can touch what’s left.
If the owner owes back taxes, Uncle Sam takes his share first — even before the bank.
If there are other liens in place from other contractors, they might come before yours as well.
Foreclosing on a lien on a property without the equity to support it could be just an expensive and time-consuming mistake.
There are services that you can use to check for mortgages, tax liens, and other mechanics liens. Need help? Levelset’s Scout Research team can handle that for you.