What is an encumbrance in real estate?

Whether you own a house or you’re looking to buy property, it’s important to know there will likely be some limits on what you, as the owner, can do with the land. These limits are known as encumbrances – legal claims or restrictions placed on the property itself, rather than the individual owner.

If you’re looking to buy a home, it’s important to know exactly how a property is encumbered before you sign on the dotted line. Because these claims often stay attached to the property even after it’s sold, understanding these restrictions now can help you avoid legal headaches or unexpected costs down the road.

Encumbrances explained

At its core, an encumbrance is a claim against a property by a party that is not the owner. This claim dictates how you can use your land and can restrict your right to transfer the property freely. When a property is encumbered, it means someone else has a legal interest in your home, whether that’s a lender, a local utility company, or a neighbor.

An encumbrance can also create what is known as a cloud on the title. This is essentially a "stain" on the property’s legal history that can call into question who truly owns the land or what rights they have. If these restrictions aren't properly disclosed before you sign a purchase agreement, they can become a major dealbreaker. In many jurisdictions, finding an undisclosed encumbrance may provide legal grounds for a buyer to rescind the contract or negotiate for damages.

Because there are several different types of claims, it is helpful to understand the distinction between a lien vs. encumbrance. While all liens are encumbrances, not all encumbrances are liens. Knowing the difference can help you navigate the home buying process with confidence.

How common are encumbrances?

Believe it or not, nearly every property in the United States has at least one encumbrance, sometimes referred to as an incumbrance. While the word might sound intimidating, encumbrances are a standard part of property ownership. In fact, many are actually welcomed by homeowners. For example, zoning laws are a common form of encumbrance that can protect your property value by preventing a noisy industrial factory from being built right next to your quiet suburban home.

However, not all restrictions are created equal. Some real estate encumbrances affect the marketability or financial value of a property, while others have very little impact on your day-to-day life. On one end of the spectrum, you have helpful local regulations; on the other, you have more troublesome burdens, like liens placed on a property to ensure debt repayment.

Ultimately, an encumbrance can affect the transferability of a property and restrict its free use until the obligation is met or the restriction is lifted. According to the National Association of RELATORS^® (NAR), professional title searches are a standard part of the homebuying process specifically because these claims are so common and must be documented to ensure a clear transfer of ownership.

Common types of encumbrances in real estate

Encumbrances can cover a variety of financial and nonfinancial claims on a property. The most common types of encumbrances are legal encumbrances, financial encumbrances, easements, restrictive covenants, and leases.

Let’s talk more about these examples of encumbrances and explain what their implications may be for buyers.

1. Legal encumbrances

Encumbrances are created by the operation of law, like environmental regulations or zoning laws. These restrictions don’t affect the sale of the property, but rather its uses. When dealing with legal encumbrances, home buyers are expected to do their due diligence to understand how a property they’re interested in purchasing can be used.

2. Financial encumbrances

Financial encumbrances, called liens, are debts incurred by owners that are lodged against the property. Let’s go over some common types of liens in real estate:

• Mortgage lien: A mortgage lien allows homeowners to afford a house over time instead of having to pay for it upfront in full. Lenders will use the home as collateral, but it won’t be affected if the mortgage payments are made on time.
• Tax lien: A tax lien can be placed on real property due to unpaid income taxes or property taxes.
• Mechanic’s lien: A mechanic’s lien is used by builders, contractors, and construction firms to afford building or repairing structures. In this case, the lien guarantees that workmen are paid if liquidation occurs.

3. Easements

An easement gives a person or an organization the right to use another owner’s property for a specific limited purpose. For example, a utility company could have an easement to gain access to a homeowner’s property to service their equipment.

In addition, a landlocked neighbor may have an easement over a homeowner’s property to access the road. Easements run with the property, so a new owner can’t prevent the easement beneficiary from using it.

4. Restrictive covenants

A restrictive covenant is an agreement to either take or refrain from taking a specific action on a property. Restrictive covenants are common in neighborhoods that follow rules established by a homeowners association (HOA). For example, an HOA may require that a home meets maintenance standards such as frequent lawn mowing or regular house painting.

5. Encroachments

An encroachment is when someone who doesn’t own the property somehow interferes with their neighbor’s property. This could be building a fence that crosses over the property line or making a structural addition that extends beyond the legal property boundaries.

Depending on the situation, encroachment can be either intentional or harmless, but it can lead to liability issues, property damage, and problems at the time of sale.

6. Leases

A lease is an agreement to rent a particular property for a certain amount of time at a certain cost. Generally, a lease gives the leaseholder rights that typically remain in effect even after a sale, though specific lease terms and local laws can vary. It’s a right to use the land in a particular way that can’t be blocked by a new owner.

How do you find out if a property is encumbered?

Now that we’ve talked about different types of encumbrances, let’s explain how you can find out if a property is encumbered. Identifying these restrictions early is one of the most important steps in your home buying journey, as it ensures you know exactly what you are stepping into.

A title search and title insurance are the best ways to learn if there are encumbrances on a property. These tactics can also protect a homeowner from any reduction in the property’s value should it turn out that there’s an undiscovered encumbrance on your property.

To find out if a property is encumbered, you can:

1. Conduct a title search through a title company: A property title search is a probe into a property’s public records to confirm the property’s rightful legal owner and to look for any claims or restrictions that may exist. After a title search is conducted, a homeowner can get title insurance to protect against certain claims or defects in a property’s title.
2. Look at the public property records: You can research local government databases or visit the county recorder's office to view recorded documents, tax information, and maps that may indicate existing claims or easements.
3. Ask your real estate agent to search for encumbrances: Your agent can help you navigate the search process and identify potential red flags in the property's history before you move forward with a purchase.

If you’re interested in learning more about a property’s encumbrances, talk to a real estate professional. A good real estate attorney can also advise you about encumbrances and whether your purchase of a property should continue. According to the American Land Title Association (ALTA), these professional searches are vital because they uncover issues in roughly one out of every four real estate transactions.

Should you walk away from an encumbered property?

Almost all properties, particularly in densely populated areas, are encumbered in one way or another. If you’re thinking about walking away from a home because of a discovered restriction, take some time to learn more about the specific nature of the claim. It’s much more important to understand the encumbrance on a property and be sure that it won't interfere with your enjoyment of the land before you walk away entirely.

However, there are some serious encumbrances that you should be aware of because they could become your responsibility if not settled before closing. While many financial encumbrances are routinely paid off at closing using the proceeds of the sale, others can be more complicated.

When to be cautious

You might consider walking away if the encumbrance significantly limits your plans for the home or creates a financial risk. Here are a few scenarios where an encumbrance might be a dealbreaker:

• Unresolvable financial liens: While a standard mortgage is paid off at closing, other financial encumbrances, such as a large federal tax lien or a complicated mechanic's lien from an unpaid contractor, can delay the sale indefinitely if the seller doesn't have enough equity to cover the debt.
• Restrictive easements: Imagine you plan to build a backyard pool, but a utility encumbrance reveals a major sewer line running directly through the center of your yard. Because the utility company has a legal right to that space, your renovation plans could be permanently blocked.
• Encroachments: If a neighbor’s garage or fence is built several feet onto the property you’re buying, it creates a "cloud on the title." If the neighbor is unwilling to move the structure, you could be inheriting a legal battle.

As always, make sure to consult with a real estate professional or an attorney about the specific restrictions of a claim before purchasing property that is encumbered. According to the National Association of REALTORS^®, clear title is a fundamental requirement for a standard purchase agreement, and you should never feel pressured to take on someone else's legal or financial baggage.

FAQ

Do you have further questions about encumbrances? Read our FAQ.

What is an example of encumbrance?

There are many kinds of encumbrances on real estate. One of the most common pertains to local zoning laws, which dictate how the property can be used. Another common type of encumbrance is a house with an HOA, as the association will determine required upkeep.

Can I remove or litigate a real estate encumbrance?

This depends on the type of real estate encumbrance. Encroachments can be negotiated with neighbors and written agreements. Easements can be more complicated, but it’s still possible to litigate these. Financial encumbrances like liens can be resolved if they are already paid off by contacting the entity that had placed the lien. Meanwhile, legal encumbrances like zoning laws are tied to government regulations and can be significantly more difficult to change or remove.

Can an encumbrance hurt my property value?

In some instances, yes, but this again depends on the type of encumbrance. Most properties have at least one encumbrance, and more often than not, it does not have an impact on property value. It’s best to attempt to resolve any financial encumbrances or encroachments in particular before putting your house up for sale.

The bottom line: Understand real estate encumbrances to avoid surprises

Real estate encumbrances are legal claims or restrictions on a property that can impact how you use or transfer your land. While many are common and harmless, such as utility easements or zoning laws, others like financial liens can complicate a sale. By conducting a thorough title search and securing title insurance, you can identify these restrictions before they become a surprise. Understanding whether a property is encumbered ensures you make an informed decision and protects your long-term investment.

Ready to take the next step toward homeownership? Apply for a mortgage today with the experts at Rocket Mortgage.

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