In this episode, I discuss why every real estate investor needs to be aware of and use a release of lien agreement. A release of lien is critical so that you do not have contractors coming to you after the job is finished and demanding payment for something you have already paid for. This happens more often than you think; it can cost you thousands of dollars that you should never have to pay.
A release of lien is essentially a document that your general contractor and all of his subcontractors sign, stating that they have been paid in full and waive their right to put a lien against your property. This should be signed and presented to you upon final payment for each stage of the rehab. Without this document, contractors, and more often subcontractors, can come back to you claiming that they were never paid. If this happens and they put a lien against the property, you must pay them before you can sell the property.
This happened to me on my very first rehab. In my case, I paid a general contractor and he was supposed to pay all of his subcontractors from the money that I paid him. He decided not to pay the electrician for the electrical work that was done to the property. I had paid him, of course, but got nothing in writing stating that the electrician was paid in full. The electrician then contacted me through a lawyer and stated that I owed them $1000 for the work they did to my investment property. Even though I had paid my general contractor, he had never paid them. I eventually settled with the electrician for $600. If they had decided not to settle with me, I would’ve had to pay them the whole $1000 before I could ever sell the house.
This was a great lesson for me, and taught me that a release of lien agreement must be presented by my contractors and all of his subcontractors before I make final payments for the work done.
A release of lien agreement is typically a one-page document that is very simple to fill out. It should be available on your state government’s website. It is a common document that’s available for free download. Here is the example of the one on the Michigan website:
Please make sure that you have one of these forms for every property that you have a contractor working on. You need to download the document that is used in your state.
Having the right paperwork as a real estate investor can save you thousands of dollars, and help you avoid any possible litigation that could come from a misunderstanding or from unethical contractors.