Avoiding Mechanics’ Liens: A Guide for Savvy Investors

Although you may be a jack-of-all-trades, sometimes it’s more efficient to hire a general contractor. Working with general contractors saves you time and headaches, especially if your project involves getting permits. The right contractor and crew – the ones with a proven track record – are essential in maintaining the profitability of your fix-and-flips. However, mismanaging or mistreating them or even having poor communication between the parties involved can drain your profits and, in some cases, delay the resale of the property. Yes, we are talking about the dreaded mechanics’ liens – the nuclear option a frustrated contractor or subcontractor can use to address the payment dispute.

A mechanics’ lien is a legal claim against a property filed by someone who hasn’t been paid for the labor or materials they provided. Contractors are the primary ones who can place a mechanic’s lien, but so can subcontractors and suppliers, resulting in multiple tiers of liability. Even if you pay the general contractor, but he doesn’t pay his suppliers or subcontractors – which you can’t control – the suppliers and subcontractors can place a mechanic’s lien. Even an unlicensed contractor can place a lien, but not for work that requires being licensed.

A mechanics’ lien complicates a property sale, and it might be impossible to sell the property until the lien is removed. As the owner of the rehab property, you will need to resolve the lien and clear the property’s title. You can clear the title by paying the lien or negotiating a release of the lien for a smaller amount.

In Washington, DC and Virginia, a mechanics’ lien form must be filed within 90 days of the completion or termination of the project. In Maryland, the deadline to file it is 180 days.

How to protect yourself from mechanics’ liens?

To protect your investment and steer clear of this hairball, we recommend taking the following steps to reduce the chance of a mechanics’ lien associated with your investment property.

1. Before hiring a general contractor, you’ll will have a lot of details to iron out, like the scope of work, timetable, and the strategy for your rehab. You’ll also want to come to a clear understanding of when and how the contractor will be paid. By reaching agreements on these critical elements, you’ll be in a much better position to respond to any disputes down the road over the quality of work, quality of materials, schedule, and payments.
2. As much as possible, pay only when the work’s completed. By doing so, you motivate the contractor to keep going. Plus, you give yourself an opportunity to inspect the workmanship and ensure everything’s completed to your satisfaction before paying them.
3. Make sure you work with a general contractor that is licensed and insured. This is one area where you definitely don’t want to cut corners, especially if the renovation is large enough to require permits. Licensed contractors are regulated by the state, so you can expect the level of knowledge and competency you want in a fix-and-flip project. A contractor with business insurance shows accountability, protecting you from potential legal and financial liabilities.
4. Protect yourself against a mechanic’s lien by adding a Conditional Release or lien waiver to your contract with your general contractor. When the suppliers and subcontractors get paid, they give a lien waiver to the contractor as proof of payment. The contractor can give you copies. While it may be a hassle to track and collect all of the lien waivers, it’s worth the peace-of-mind knowing you won’t be blindsighted by thousands of dollars of unpaid invoices.
5. Keep the channels of communication open with contractors so they feel comfortable voicing any concerns before they escalate to larger problems. You might just find out that they’re running into issues paying their subcontractors, and you can deal with this problem before it snowballs.
6. Consider paying subcontractors directly, because it’s difficult to control whether contractor pays his subcontractors. Subcontractors who aren’t paid on time may stop working on your project, causing delays that might affect the entire rehab schedule. Project delays are to be expected, but the most successful investors know how to anticipate the delays and respond in ways to keep the project timeline moving forward. After all, a quick sale will free up capital for the next investment opportunity, but a project delay can cut into your profits.

Mechanics’ liens are more than just a nuisance—they’re a serious threat to your bottom line as a real estate investor. They can delay your project, tie up your property title, and drain your profits faster than you can say “fix-and-flip.” But with the right planning, clear communication, and smart safeguards like lien waivers and payment structures, you can minimize the risk. Ultimately, the goal is to keep your project moving smoothly, your contractors paid fairly, and your investment protected. In the world of real estate rehabs, staying proactive and detail-oriented isn’t just good practice—it’s essential to your success.