Your real estate is one of your riskiest investments – not just with the volatility of returns in recent years, but because of exposure to liability.
Your property can easily be encumbered, hindering or preventing you from exercising your full rights to do what you want with it.
To remove the encumbrance, you might have to pay twice for the same work. In the worst case scenario, you might even be forced to sell your property.
How do you protect your investment?
There are two principal circumstances in which a claim against your property is likely.
First, you could suffer a judgment, whether it arises out of your ownership of the property – as with someone who is injured on the premises – or with an unrelated incident, such as an automobile accident, in which your property is seized to satisfy the judgment.
One way to protect yourself is through liability insurance. But it could be expensive or unattainable for what you want covered.
Wise investors search for ways to insulate themselves from liability. All things considered, probably the best way to defend is to hold your property in a limited liability company. An LLC provides protection from personal liability. The members of an LLC cannot be named personally in a suit against the LLC.
If someone who has done work on your house has not been paid for those services, you may find your real estate attached by a construction or mechanics’ lien.
Who can claim a lien on your property? Contractors, laborers, material suppliers, subcontractors and professionals such as architects, landscape architects, interior designers, engineers or land surveyors all have a right to file a claim of lien for work or materials. Most often, it’s a subcontractor or supplier who has not been paid by the general contractor. When such circumstances occur, you could be on the hook.
But diligently pursued preventive measures can substantially safeguard your property.
Know your workers
The first step in avoiding unpleasant surprises is knowing exactly who is working on your property. Have your general contractor provide a detailed cost breakdown of the work to be performed.
This should list each task, the expected cost and – most important for these purposes – all the subcontractors and suppliers with whom the general has a contract. The breakdown will enable you to monitor costs and know the identity of all the parties who need to be paid.
Watch those checks
When you do pay, a simple and widely recommended measure is to take control of your checks. Don’t simply issue them to your contractor. Either pay your subcontractors and suppliers directly, or issue the check in the names of both the general and the sub, so that both will have to sign off.
Get a release
But perhaps the most important single measure you can take is to obtain a release of lien from anyone who does work for you. Go down the list your contractor gave you and make sure, before any money leaves your hands, that you have a release from everyone you are paying on the list.
If you’re making partial payments, it can be a partial release. But before that final payment, get another list from the general contractor, this one recording everybody on the project who has not yet been paid. Do not make that final payment before you have releases from everybody on the list.
Adopt the rule: No check goes out without a release of lien.
Liens are creatures of state law, and many states and localities offer information about how to avoid them.
Be sure to check with the appropriate state agency, such as the construction licensing board. Read the fine print on your contract. Many states require that construction contracts provide information about how to prevent liens.
Work closely with your CPA to adopt the best specific preventive measures before you expose yourself to potential liability.