Johnny and Betty planned to remodel and add a room onto their house. They were both pretty handy, so they decided to do the work themselves and pay out of their savings. A few months into the project, they realized they needed some help and decided to borrow some money and hire a contractor. So they went down to the bank for a construction loan on their house. To their great surprise, the bank would not make them a “Mechanic’s Lien” loan since the work was already in progress.
We are frequently asked questions about Mechanic’s Liens, or a lien or mortgage secured by your home for construction of improvements. Texas’s system is perhaps the most confusing of all the 50 States. First, there are two separate things which are frequently referred to interchangeably as Mechanic’s or Labor liens. On the one hand, a “Mechanic’s and Materialman’s Lien” is a lien filed by a laborer or supplier of materials when they are not paid. That is a completely different subject for another post.
On the other hand, our subject for today is a Builder’s and Mechanic’s Lien, frequently referred to as an “M&M”. It is a contract entered into between the owner of property and a builder for construction of improvements (generally to build or remodel a family home). The contract is then assigned by the contractor to a Bank, which acts as the “Interim Lender” throughout construction. Texas Courts have said that the M&M must be signed by both spouses and filed “prior to the first spade of dirt being turned.” Technically, the lien is invalid if not done prior to the start of construction. Occasionally, a situation will arise like Johnny and Betty’s where people will start building using their own money, but when they need a loan they find that it is impossible to get a loan secured by a valid mortgage because “the first spade of dirt” has already been turned.
Before you add your man cave or build that beautiful new home — in other words before you turn the first spade of dirt — be sure and assess the costs and time frame. If you have any questions, we would love to help you plan ahead. There are options we can suggest to help you structure your remodel so you don’t end up in a pickle like Johnny and Betty. Give us a call at (254) 300-7909 or come see us.