Purchasing Real Estate with a Mechanics Lien

November 14, 2023
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Are you looking to buy a home or any other piece of real estate for that matter including commercial or industrial, but you’ve discovered that there’s a mechanics lien on it? Don’t worry, you’re not alone. Mechanics liens are a common occurrence in the real estate world, howevever they present a major obstacle to a smooth closing.

What is a Mechanics Lien?

A mechanics lien is a legal claim that a contractor or subcontractor can file against a property owner and the property itself to secure payment for work and improvements that they have performed on the property. The lien attaches to the property, so it will follow the property even if it is sold. Mechanics Liens are governed by the Illinois Mechanics Lien Act, 770 ILCS 60/1, et seq.

To file a mechanics lien, the contractor or subcontractor must first give the property owner a written notice of their intent to file a lien. If the property owner does not pay the amount due within a reasonable time of receiving the notice, the contractor or subcontractor can file the lien against the property.

Once a mechanics lien is filed, it will cloud the title to the property. This means that the property cannot be sold or refinanced until the lien is released.

How Does a Mechanics Lien Affect Real Estate Transactions?

A mechanics lien can have a significant impact on a real estate transaction. If a buyer is unaware of a mechanics lien on a property, they may be surprised to find out about it after they have made an offer. This can lead to the deal falling through, or it can require the buyer to pay the amount due on the lien in order to close the transaction. The deal falls through because the seller would fail to deliver “marketable title.”

Even if a buyer is aware of a mechanics lien on a property, it may still be difficult to get financing. Lenders are often hesitant to lend money on properties that have mechanics liens, because they are concerned that they may not be able to get paid if the property owner defaults on the loan. Furthemore, the lien act issues priorties and if in the event of a foreclosure, the lien might be paid first in line ahead of the lender or mortgagee.

Risks and Rewards

Venturing into real estate with a looming mechanics lien undeniably adds layers of challenges:

  • Financial Obligation: The primary risk emerges from the responsibility to settle the unpaid debt. If left unaddressed, the new owner might be legally bound to pay off the lien.
  • Transaction Delays: Before finalizing the property purchase, the lien needs resolution, either through direct settlement, negotiation with the lien holder, or, in some cases, litigation.
  • Legal Complexities: Mechanics liens, coupled with provisions from the Illinois home repair and remodeling act, create a complex legal framework. Navigating this requires specialized knowledge, often necessitating the expertise of an Illinois mechanics lien attorney or a Chicago mechanics lien lawyer. Furthermore, even if the seller purchased a title indemnity bond over the lien claim, the lien still remains on title. The unpaid contractor can subsequently file a lawsuit to enforce the lien claim pursuant to the Illinois Mechanics Lien Act and seek foreclosure of the property to pay the lien claim. This could result in an unwitting buyer’s participation in months or years of tedious litigation until the lien is resolved by settlement or trial.

However, where there’s risk, there’s often potential for reward:

  • Price Negotiation: Armed with the knowledge of an existing lien, potential buyers have the leverage to negotiate the property price, reflecting the unsettled debt.
  • Debt Settlement Opportunities: Some lien holders, eager to retrieve a portion of their money, might be open to negotiating the owed amount, allowing the buyer to settle for less than the initial debt.
  • Under Market Value Purchase: Even after the lien resolution, the final purchase price of the property can end up being considerably lower than its market value, translating to significant savings or potential profit for the buyer.

What Can You Do If You’re Considering Buying a Home with a Mechanics Lien?

If you’re considering buying a home with a mechanics lien, there are a few things you can do to protect yourself.

You should have a title search performed on the property as is common in most real estate transactions and closings. This will reveal any liens that are currently on the property, including mechanics liens. If you find out that there is a mechanics lien on the property, you should contact the contractor or subcontractor who filed the lien. You can try to negotiate a settlement with them by hiring an attorney to represent you.

Is it a Risk Worth Taking?

You need to weight the risks along with the benefits. Investing in real estate with a mechanics lien might initially seem overwhelming, and yes, it’s a complex process. But with the guidance of a seasoned Illinois mechanics lien attorney, you can turn a daunting prospect into a potential investment opportunity.

At Grzymala Law Offices, our attorneys have a comprehensive understanding of mechanics liens in Illinois and can provide the necessary guidance, advocacy, and negotiation skills to navigate through your property purchase journey. Reach out to us today and let’s transform your real estate vision into a successful reality.