The Importance of Lien Waivers When Rehabbing Properties

An investor recently said to me, “I am nearing the end of a five-month rehab that was a nightmare. I never used partial lien waivers, but I still owe a big fat final check. Should I and could I get a final lien waiver”? I said “absolutely.”

Many investors have said, “Well if I didn’t start it from the beginning, so why should I bother with it now?” Every lien waiver states that the contractor has been paid for work done up to the date of that particular lien waiver. The message: It’s never too late to start, even on progress payments!

You will be glad you did because if you paid the money owed to the contractor with whom you signed a contract with, you don’t want someone you’ve never heard of (a subcontractor) saying, “I didn’t get my check because someone else was not doing the right thing and didn’t pass the money down the line.” If you have your signed and notarized lien waivers, and you used your lien waiver stamp, imagine somebody trying to say, “Hey I didn’t get paid.”

They might not have but it is no longer your legal concern. You have your ducks in a row and you are protected.

Here are the types of Lien Waivers:

Partial lien waiver. Also known as a “Partial Mechanic’s Lien Waiver on Progress Payments”, this is the waiver you use for all payments after the down payment and before the final payment.

Final lien waiver. The “Mechanic’s Lien Waiver on Final Payment” is used when you pay the very last check you’re going to issue, usually when you’re paying the retention.

Lien waiver check stamp.

From the “there’s no such thing as too much protection” department, I highly recommend that in addition to the lien waivers, you stamp the back of EVERY check with the standard lien waiver language (which basically says by endorsing and cashing the check, they waive partial liens).

Finally,  Here are the ‘must haves’ on Lien Waivers:

• Original contract info: date, contract number, and dollar amount.
• Prior balance.
• Amount of this payment.
• Balance forward, including Change Orders.
• A statement that payment is made for ALL services, labor, equipment, and materials furnished up to the date of the release.
• Lien waiver MUST be signed by an officer of the contractor’s corporation or member of LLC.
• Contractor’s signature MUST be notarized!

I’ve seen people slack off on the notarization part. Don’t! It is worthless without it. If I am a “bad guy” contractor, I can argue that you forged my signature on the release. The notarized signature makes this virtually impossible.

Finally a word on Issuing Checks:

You never make a check payable to an individual for work on your house. Remember your lien and tax exposure by paying individuals. It should always be a legal business entity; a corporation or an LLC. It recommended that before you start cutting checks, make sure that the ‘payee’ is identical to the business entity name on the original contract, and that is the same business entity pulling the permit. 

Of course, there is a lot more to rehabbing than just this, but making sure that you get lien waivers when needed will help to keep you out of hot water when it comes to real estate investing.