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By Richard Selzer

How You Can Lose Your House to the Guy Who Installs Carpet

     Let me tell you a cautionary tale. The details are theoretical, but the legal statutes are real and understanding them could save you from losing your home.

     Imagine a capable, handy fellow—let’s call him Dave—who finds a raw parcel in the hills outside Ukiah. He buys it, parks his RV on it, and sets out to build his own house. He's not a licensed contractor, but he's good with his hands. He'll act as his own general contractor: hire out the specialized stuff and do the rest himself.

     The first order of business is a septic system. Dave calls a reputable septic company that comes out and installs the tank. Dave pays them, and everyone moves on. A couple of months pass. A foundation contractor comes in; the job runs fifty percent over budget. Dave needs cash. He's not going to a bank because bank loans require things like insurance, so he borrows from his brother-in-law, who records a deed of trust against the property. Construction continues. Dave does the framing, the roofing, the drywall, nearly everything. Finally, the last contractor shows up and lays carpet throughout the finished house.

     Then the house burns down (before Dave pays the carpet guy).

     Here's where it gets weird. The flooring contractor files a mechanic's lien, a legal claim against the property for unpaid work. That’s reasonable enough, but what’s not is that in California, a mechanic's lien doesn't date from when the lien is recorded. It dates back to when construction first began on the property.

     That was the day the septic crew showed up.

     This means the carpet installer's lien has legal priority over the brother-in-law's deed of trust, recorded months later. The flooring contractor can potentially foreclose on the property and wipe out the lender's position entirely. The brother-in-law loses his loan over carpet on a house that no longer exists.

     I know. It doesn't make sense. But it is what the law is.

     So what should Dave and his brother-in-law have done differently? Several things.

     Get course-of-construction insurance.  This is coverage specifically designed to protect against fire or other calamity during a build. A bank would have required it. Dave's brother-in-law didn't know to ask. One policy would have resolved this entire nightmare before it started.

     Consider a performance bond.  A performance bond serves as an insurance policy guaranteeing that the contractor finishes the work properly and at the agreed upon price. It costs roughly three percent of the job. Contractors typically add it to the bid. It's cheap peace of mind when you don’t know the contractor well.

     Keep every receipt and canceled check.  This is always good advice, not just for mechanics liens, but also for tax purposes. You'll need documented evidence of what you actually spent. And before a title company will issue insurance, they’ll require a "lien-free endorsement" that requires you to prove you’ve paid every contractor. The problem is they can't see underground work. A septic system is invisible. This is exactly how priority disputes arise.

     If you can't produce receipts, you need a notice of cessation. This is a recorded document stating no work has been performed on the property for ninety days. The clock restarts the moment anyone picks up a shovel. People sometimes keep doing small jobs during the waiting period without realizing they've just reset the clock.

     Borrow from a lender who knows construction.  Banks that do construction loans require insurance, inspections at every draw stage, and contractor affidavits that all subcontractors have been paid. Your brother-in-law loves you, but he doesn't know what he doesn't know.

     Hire a construction management company to verify completed work at each stage before money changes hands. It's an expense, but it costs a lot less than losing your house to a lien filed by someone who laid carpet for three days.

     If you're planning to build, especially as an owner-builder, you need to know what you're walking into. The man installing your floors at the very end of the project may have more legal claim to your land than the person who funded the whole thing.

     Talk to your title company before you break ground. Talk to an attorney well versed in this. As soon as the septic system goes in, your legal exposure begins.  

     If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

     Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.