About Real Estate: Contractor’s lien can hold up a homeowner’s sale

Question: We were reviewing the paperwork for the upcoming purchase of our new home, and noticed that the seller owes $4,222 for a “mechanic’s lien” that must be paid before the deal can close. What is a mechanic’s lien?

Answer: It’s a lien that’s filed against a homeowner, usually by a general contractor or subcontractor, who has gone to court and provided evidence that he or she wasn’t paid for services or materials needed to complete the job.

Your question is a timely one, as the peak remodeling season is getting under way.

Let’s say that you hired a plumber to re-pipe a couple of rooms but then refused to pay the bill. The plumber could go to court, obtain a judgment for his unpaid services and materials, and then slap a mechanic’s lien against your home for the total amount you owe him.

The lien would prevent you from refinancing or selling the home until the plumber got all of the money he is owed.

More often, though, mechanic’s liens stem from a general contractor who gets into a dispute with a subcontractor — a squabble that leaves the homeowner caught in the middle.

To illustrate, say you hire a general contractor for a major remodeling job that includes the addition of two new bedrooms and a bathroom. The GC then hires several subcontractors to help complete the job, including an electrician, a roofer and a tiler.

You’re happy with the job, and the general contractor is paid in full. But a few months later, the electrician sends you a bill for $2,500 for the work and materials that he supplied. It was the general contractor’s duty to pay the electrician, but he kept the money for himself instead.

The subcontractor would then have the right to file a lien against your property for his unpaid work. If you’re fortunate, he might be willing to settle the matter for, say, 50 percent of the total bill. You could then sue the general contractor in small claims court to get the rest of your money back, but good luck; if the GC wouldn’t pay the subcontractor, he probably won’t pay you either.

There are a couple of ways to help you avoid such possible pitfalls. One is to insist that the contract you initially sign with the general contractor includes a provision that calls for him to produce a performance bond, sometimes called a completion or contract bond, which is basically a short-term insurance policy that will reimburse you if the contractor doesn’t fulfill all of his contractual responsibilities.

A performance bond can be expensive, so many general contractors balk at paying for one. An alternative would be to include a “lien waiver” in the original contract that requires the contractor to sign a statement indicating that all of the labor and materials for the project have been paid before your next installment payment is due.

A lien waiver isn’t a bulletproof way to insure that you won’t eventually get sued if a dispute arises, but it provides at least a modicum of protection against a lawsuit that might be filed by material suppliers, a subcontractor or the general contractor himself.

Real estate trivia: Nearly 40 percent of all home remodelers get their design inspirations from remodel-themed TV shows, according to a survey by American Express. Other favored sources are online magazines and do-it-yourself Internet blogs.

Q: How long will the bankruptcy I filed a few years ago stay on my credit record?

A: If you filed Chapter 7 — often called a “straight” bankruptcy because no money is repaid to any creditors — it’ll stay on your record for 10 years from the date of the filing.

If you instead filed Chapter 11, which requires that at least some of the debt is paid back, it’ll stay on your credit record for seven years from the filing date.

Q: A home we like was listed for $214,000, and we made a full-price offer. The seller then made a counteroffer for $220,000. Isn’t he legally obligated to sell the house to us because our initial offer matched his $214,000 asking price, or does he have the right to try to squeeze us now for an extra $6,000?

A: I get this type of question every time that the housing market heats up (as it has now) and many homes start drawing multiple offers from buyers.

Sorry, but the seller isn’t legally obligated to sell his home to you, even though you offered to pay his full asking price. He didn’t sign a contract accepting your offer, so he’s free to look for a buyer who is willing to pay even more.

If he can’t find such a buyer and then decides to accept your original $214,000 bid, you won’t have any legal obligation to go through with the deal, either. That’s because your original offer was automatically rendered null and void the moment he made a counteroffer for $6,000 more.