Encumbrance In Real Estate: Definition And Effects On Property Ownership

Before you buy a home, you want to do your due diligence and know everything you can about the property you’ll own. One of the things that sometimes is overlooked are possible real estate encumbrances, which may affect what you can do with your new home.

Let’s go over what a real estate encumbrance is, the common types, what to watch out for and more.

What Is An Encumbrance In Real Estate?

By definition, an encumbrance in real estate is an outside claim against a property that impedes what a homeowner can do with their home or land. Encumbrances can also affect the salability of a property.

If you’re looking to purchase a home, you need to know whether anyone else can make a claim about how the property is used. Here are just a few examples of how an encumbrance can affect a property:

• A lease will put limits on what you’re able to do with the property.
• An involuntary lien can impact the sale of a home.
• Local zoning laws can limit your ability to make updates to your home.
• An encroachment can lower the value of the property.
• An easement could give another person the right to access or make changes to your property.

Legally, homeowners are required to let potential buyers know about any encumbrances on the property. However, it’s still a good idea to do your own research so you can go into the sale well-informed.

What Are The Most Common Types Of Encumbrances?

One of the most challenging aspects of encumbrances is that there are so many different types that can be placed on a property (such as financial and nonfinancial), and they can all have different implications.

For instance, encumbrances that are put in place by homeowners associations (HOA) are usually there to protect the property value of homes in that neighborhood. On the other hand, a lien could negatively impact your property value and make it harder to sell your home.

Encumbrances are not part of the home appraisal. Most of the time, a title search will reveal liens or other encumbrances. If you find the property has any encumbrances, take the time to learn what they are before closing.

Let’s take a closer look at the different types of encumbrances you might encounter.

Legal Encumbrances

Many homes in the U.S. are in areas zoned for a particular use. These categories will vary depending on where you live and the type of property you own. Some of the most common types of zoning laws include:

• Residential: Residential zoning laws usually apply to single-family homes, condominiums, apartments, duplexes and manufactured homes. These laws cover issues like whether manufactured homes can be used on the property and the types of animals a homeowner can have.
• Commercial use: Commercial use zoning laws usually apply to office buildings, hotels, warehouses, shopping areas and real property like ponds or roads. These laws may regulate the proximity of certain types of businesses or even ban some types of businesses.
• Mixed use: A mixed-use zone usually refers to an area where there’s a combination of housing, commercial properties and retail stores. A good example of this would be an apartment building that’s located above a restaurant or other type of business.

Financial Encumbrances

Many encumbrances are formed by debt, typically referred to as a lien. If a creditor or other party has a lien against a property, it means the property can’t be sold unless the debt is paid in full.

Common financial encumbrances include:

• Mortgages: Your lender has a lien against your property until the mortgage is paid in full. If you stop making your mortgage payments, the lender has the right to seize the property and foreclose on the home.
• Mechanics’ lien: A mechanics’ lien is unpaid debt for work done on the property. If you hire a contractor to do work on your property and never pay the full balance, that individual can file a mechanics’ lien on your property.
• Tax liens: If a homeowner fails to pay their property taxes, then a tax lien will be placed against the property.

It’s highly unlikely that a property owner will be able to sell their property with an outstanding lien. These types of liens usually appear in public property records.

However, it’s still a good idea to check on potential liens before buying a new home. If an outstanding lien is not discovered during a title search, it will become the responsibility of the new owner.

Easements

An easement refers to the right of someone other than the homeowner to use that property for a specific purpose. For instance, your utility company has a right to run a gas line through your property.

Or, if there’s a walking trail that runs through your property, pedestrians may have a right to access that trail. And in some rural areas, there may be easements that allow people to cross property lines to reach their own land. This is known as an easement by necessity.

It’s important to understand that property owners cannot interfere with a legal easement. If you do, you could end up being liable for damages.

If you find yourself embroiled in a dispute over an easement, it’s best to contact an experienced real estate attorney. They will be familiar with the regulations in your state and can give you advice on how to best move forward.

Deed Restrictions Or Restrictive Covenants

A deed restriction is written into the deed and passed down from owner to owner. Deed restrictions or covenants can show up in a variety of ways. For instance, it used to be common practice to limit a future owner by placing restrictions on a deed or entering into a restrictive covenant with neighbors.

Today, restrictive covenants are most widely used by HOAs. An HOA will often place restrictions on things like parking, property use or anything else that could cause resale values to go down.

Leases

A lease is a contract or agreement that allows an individual to rent the property from the owner for a specific amount of time. A lease is considered an encumbrance because the property owner doesn’t give up their right to that property.

And the individual leasing the property doesn’t have the right to do whatever they want with it. Their use of the property is limited to the terms outlined in the lease agreement.

Should You Still Buy A Property With An Encumbrance?

At first glance, encumbrances may seem like a negative thing, but almost all properties are encumbered in one way or another. Encumbrances are often set up to protect the property and benefit the property owner.

However, there are certain types of financial claims and encumbrances you’ll want to avoid that can hurt the value of your property, cause you financial trouble or put restrictions on how you’re able to use it.

If you’re interested in protecting yourself from harmful encumbrances, you should consider requesting a general warranty deed. This type of warranty guarantees there are no encumbrances against the property other than those outlined in the deed.

The Bottom Line

An encumbrance is any type of claim against a property that was put in place by someone other than the owner. Many encumbrances exist to protect the value of the property and make it more convenient for everyone involved. The key is to be informed and know how the encumbrance could possibly affect the property in the future.

That’s why it’s a good idea to run a thorough title search before buying a home or purchasing any type of property. A title search may save you from any unpleasant surprises down the road.

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