Can Your Mechanics Lien be Wiped Out in Foreclosure?
We all recognize the importance of recording a mechanics lien. It goes against the owner’s property and prevents that person from selling or refinancing the property. As a matter of public record, it can also go against their credit standing through the reporting agencies of Experian, TransUnion, and Equifax. But it is not impregnable, and we are asked frequently if a mechanics lien can be wiped out in a foreclosure proceeding.
The best way to explain this is give an example. Assume a parcel of property, before you perform work, has a first deed of trust with the bank and a second deed of trust or mortgage securing a personal loan. As far as mechanics lien priority, most states find if these mortgages are of record prior to the first visible work done to the project, they will take priority if there is a foreclosure. But if there is any substantial or visible work, for example staking, grubbing, demo, or grading, before the recording of a deed of trust, then all contractors and suppliers have priority which relates back to that first moment in time. So, for example, if there is a demolition contractor who did work on January 15, but you don’t do your electrical work until March, your mechanics lien priority like every other contractor, relates back to the first person’s work on the property.
If the contractors have priority over the mortgages, this means that when a mortgage foreclosure takes place, they take the property subject to your mechanics lien and you must be paid, along with all others who have filed such mechanics liens. So far so good.
But that is uncommon. In most cases, the mortgages are ahead of you. So what happens with a foreclosure? Unfortunately, in most cases, you will be wiped out. The foreclosure sale is actually an auction in which the trustee or court receives bids. If the first mortgage is owed $110,000.00, they simply make a credit bid. It is then up to the second mortgage to either cover or outbid the first. If they do not do so, they will be wiped out as well—along with your mechanics lien. You like anyone else can also appear at the auction and bid above the first and second to acquire the property. But remember, in most foreclosures, the property is “under water” and you may not want to do this.
Many creative lawyers have tried to find a way around such a foreclosure process, but there really isn’t any (assuming all the technicalities of the foreclosure are met). Your only option is defer the mechanics lien claim and bring a breach of contract action against the person you have a verbal or written contract with. Assuming they are solvent, you at least have some viable legal redress.