How do you assure that the Contractor pays for the supplies and pays the subcontractors? Each person building a home needs to know about Lien Releases and Mechanics Lien.
Per the book The Complete Idiots Guide to Building Your Own Home: “What’s a Mechanics Lien? You’re building a house, not a car. So, why should you care about a mechanics lien? Anyone who helps you build your house, investing time and/or money, is considered a mechanic by law. And a lien is a piece of paper that offers your property as security until payment for services is made.
For example, the plumber comes out and puts in all the plumbing and fixtures in your beautiful new house, but you run out of money and can’t pay him. If the plumber was smart, he had you sign a mechanics lien before starting work. He can sue you for the money and force the house (with his plumbing) to be sold to pay him off.
If the lender is smart (and she is), draws may not be paid to the plumber until the bill is submitted along with a lien release. The plumber gets the check and simultaneously releases any rights to sue for the house.
A mechanics lien is a little better than a typical lien (at least for the mechanic) because it says, “Hey, I participated in the construction of this house and should get priority in payment over other types of creditors.” So, who are all these mechanics? You, the lender, the general contractor (if any), subcontractors, suppliers, and —everyone’s favorite—the IRS.
If you sign a mechanics lien, make sure you understand what it’s saying and who gets priority. And make sure, when the work is done, that the contractor signs a lien waiver when the check is disbursed.
Code Red: Your contractor gets the check for the plumber, but doesn’t pay him, so the plumber files a mechanics lien on your house. Ouch! Make sure your contracts cover this potential problem. Alternatively, have the lender or an escrow officer pay the bills and draws to make sure it’s all legal.”
For more information on liens click on: http://www.saroff.com/examples/businessdebt/lien-release.htm