Buying A New Home? You May Want Some Additional Protection Against Liens
If you are trying to buy a new home in a development, you may be thrilled at the idea of being the first person to own the home. But this comes with a risk—that of subcontractor liens demanding payment from you. Unfortunately, sometimes developers and contractors do not pay their subcontractors, leaving the subs with only liens against property owners as a way to get paid. To protect yourself from these liens, you should have title insurance. But to get that title insurance, you may need to get something called an ALTA survey, which is normally connected with commercial properties. Here's a look at what the survey does and why you should seriously consider spending the money for it.
Liens of Last Resort
Subcontractors don't want to file liens, but they do want to get paid. If the developer decides to skip out on payment after all the work on a development is done, though, the subcontractor won't have a lot of options. In some cases, the subcontractor could sue the developer under a prompt-payment law, if your state has one. However, the subcontractor may only be able to charge you, the homeowner, instead. And that can add thousands of dollars to your home purchase cost.
One way to avoid liens is to verify with the developer that everyone's been paid. However, even that tactic doesn't work if the developer isn't being honest. For example, Angie's List reported in January 2016 about a case in central Texas where a homeowner thought she paid a developer in full for a house. She then received lien notices totaling over $23,000. It turned out the developer had lied about the payment status of the subcontractors, claiming they'd been paid when they really hadn't.
Insurance Against Liens
Homeowners may want to get title insurance, which can help cover the cost of liens. Note that this is not the same type of title insurance that covers a mortgage; that insurance is to protect the lender. The title insurance you want protects you, specifically, as the homeowner.
But to get title insurance, you need a land survey, and you need one that can't be disputed based on varying state laws and one that isn't vague in its findings. Many people think a boundary survey will do, but those are done according to state law. What you really want is an ALTA survey, which follows the nationally accepted guidelines from the American Land Title Association. This is a survey that is very detailed in its findings and that can cover a range of optional investigations, such as evidence of earth-moving work.
ALTA surveys are normally associated with commercial property purchases because of the surveys' higher costs. However, a basic survey for a smaller property can cost just under $2,000 (per this online calculator), so you're not talking about a gigantic amount of money compared to the potential cost of a lien.
You are much better off getting the ALTA survey done and getting insurance instead of leaving things to chance. As the example from Angie's List showed, even due diligence in checking whether everyone's been paid can fail at protecting you from liens.
If you'd like to arrange for an ALTA survey, talk to survey companies in the area (like Arizona Surveying and Mapping) about the options they offer and what the survey might cost you. Work with your lender, too, to find a good title insurance company.