The Inside Outside Guys: A cautionary tale

You did everything right. You created a budget and saved your money for the dream kitchen you’ve always wanted.

You sought out referrals for the best contractor, then researched her business history and called prior customers before hiring her company to do the work.

Custom cabinets and countertops and one-off millwork were specified and ordered.

You faithfully paid the contractor as work progressed and, after decades of dreaming about this, actually allowed yourself to imagine the project completed and servicing your family and invited guests during the holidays.

Then the job seemed to jump off the rails as workers failed to show up and phone calls went unanswered. Further investigation verified the company no longer exists after a bankruptcy filing.

This is not a common scenario in the construction industry, but it is a predictable one in good times and bad.

In great times like these, a company run by a bad businessperson can easily be fooled by being very busy and having lots of cash flow until one day they realize poor practices have led them to a “rob Peter to pay Paul” situation.

In tough economic times, a similar company might under bid work just to get it, then realize they cannot sustain the business when it is underfunded.

In both cases, customers are left holding the proverbial bag and may discover monies paid to the contractor for labor and materials furnished to their project were spent elsewhere to cover prior company debt.

In a situation such as this, the homeowner may receive notice of a lien claim made against their property for payment. Perhaps the lumber yard that furnished most of the material to your project was never paid by the company you hired.

In theory, a legally supported claim of lien gives ownership rights in property to the claimant. If they shipped $20,000 worth of materials to your project, they may now have a share of equity in your property equal to the value of materials shipped. They might enforce these rights by having your property sold at a public auction to satisfy the debt.

Your choices to prevent such a sale will include paying the supplier what they are owed, even though you already paid the contracting entity for these materials.

We call this “double jeopardy” and it is a frightening scenario for any property owner to consider.

Note the Guys are not attorneys any more than we are master electricians. In a situation such as we describe, we strongly suggest one of our attorney referrals at the very least.

How can you minimize the chance of such an occurrence?

Several strategies might help. Just as you might decide on an acceptable risk tolerance when you ensure an auto mobile with a $1,000 deductible, you should consider the same thing when having work done on your property.

After this analysis, you then enlist an attorney that knows the industry and the specifics of the laws that apply. One of your best risk management tools is an attorney familiar with construction issues.

Only work with companies that have a great, and well-earned, reputation. Talk to prior clients before signing a contract.

You should also talk to major suppliers the contractor uses, including information regarding how they handle credit accounts.

You might elect to make direct payments to these suppliers and contractors as the job progresses to assure payment and credit to your specific property. A supplier might just credit a contractor’s running account without specifically showing payment for materials used on your job.

Direct payments you make would then be credited against amounts owed to your contractor.

Keep in mind that lien rights may apply to all labor furnished to your job and, in some cases, to “second tier” suppliers like that company out of state that built your cabinets pursuant to an order placed by the local lumber yard.

At each request for payment, you should receive a sworn statement that lists all potential lien claimants and amounts paid and owing.

There is a lot of nuance to the laws that apply to property liens including notice provisions and timing issues. Some companies will record a claim of lien that is not legally supported but can still “cloud” the title to your property and cause concern with your mortgage lender.

Yet another reason why a good legal advisor can be invaluable and is strongly advised.

Home projects should be enjoyed and celebrated. The first step is to always use companies with a great reputation and a proven track record. Like those you’ll find at Insideoutsideguys.com.

For housing advice and more, listen to the Inside Outside Guys every Saturday and Sunday on News/Talk 760, WJR-AM, from 10 a.m. to noon or contact us at insideoutsideguys.com.