The hidden risk of unpaid work.

ST. LOUIS, MO–The papers here lately have carried stories of a once-respected local builder, whose ruinous attempts to save his business have landed him in prison.

As reported in the Globe Democrat, Edward Levinson borrowed millions from three banks to build custom homes in upscale subdivisions, but failed to pay his contractors and material suppliers while falsely representing that all bills were paid when the homes were sold.  He also took down payments from home buyers, which he used to keep his business afloat rather than to construct their homes.

Levinson was the owner of Levinson Companies, a firm founded by his father more than 50 years ago.

Facing multiple criminal charges, in June Levinson pleaded guilty to one count of bank fraud. He was sentenced to 51 months in federal prison, and ordered to pay restitution of $13,457,603 to a long list of victims.

Some buyers in this neighborhood got a nasty welcome

Behind the news coverage, there are untold stories of home buyers who, along with their lenders, were stuck with mechanics’ liens against their properties.

Missouri, like most other states, has laws allowing a provider of labor or materials for construction to file a lien against the improved property if their bills and invoices go unpaid. This construction lien is most commonly known as the “mechanics’ lien.” If necessary, the unpaid improver can file suit to force a sheriff’s sale of the property to satisfy his lien.

Buyers hit with sixteen lien claims, totaling $446,401

In one such case, within months of moving in  buyers of an $898,000 home were surprised to be served with a total of sixteeen liens, claiming $446,401 due for everything from drywall to landscaping. Not to be outdone, their neighbors are looking at nineteen liens totaling $345,468 due.

Because they have title insurance, most of Levinson’s buyers and their lenders are protected. The real losers will be the banks that loaned money to Levinson, his contractors and suppliers who failed to timely perfect their liens, and buyers who lost down payments. And, of course, the title insurance company.

Moral: The risk that property may be charged with mechanics’ lien claims can be hard to assess before closing a purchase, because liens filed after closing may “relate back” and have priority as of the date of commencement of work on the project as a whole. So a carpet layer may have the same lien rights and priority as the contractor that laid the foundation

In other words, the risk may be virtually undetectable. And, this risk exists with resale properties, as well as new construction.

Mortgage lenders require title insurance coverage against this “hidden” risk; so too should buyers.