What is an encumbrance in real estate?

Whether you own a house or are 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 property. These limits are known as encumbrances and are placed on the property itself, not the owner.

If you’re looking to buy a home, it’s important to know how the property is encumbered before making the purchase. Let’s learn more about what an encumbrance is and answer any questions you may have about this type of restriction.

Encumbrances explained

An encumbrance is a claim on a property that dictates how the homeowner can use it. The claim is brought up by a party who is not the owner and encumbers, or restricts, what the owner can do with the property. An encumbrance can create a cloud on the title of a real property. This type of limit, if not properly disclosed prior to the purchase agreement, can allow the property buyer to back out of the sale and possibly seek damages in some jurisdictions.

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.

Some real estate encumbrances affect the value or marketability of a property, while others don’t. Many encumbrances are welcomed by an owner, such as zoning laws that prevent homes in an area from being used for commercial purposes. Others can be more troublesome, like liens placed on a property that seek debt repayment.

An encumbrance can affect the transferability of a property and restrict its free use until it’s lifted.

Common types of encumbrances in real estate

Encumbrances can cover a variety of financial and non-financial 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 anything from building a fence that crosses over the property line or even a structural addition that extends beyond the legal property boundaries.

Depending on the situation, encroachment can either be intentional or harmless, but it can lead to liability issues, property damage and even 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. A lease gives the leaseholder rights that are unaffected by a sale of the leased property. 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.

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 go more in depth, 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.

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.

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 an encumbered property, take some time to learn more about the encumbrance. 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 property before you walk away entirely.

However, there are some serious encumbrances that you should be aware of because they could become the responsibility of the new owner if not settled before closing. This category includes financial encumbrances aside from the mortgage, which are paid off at closing with the proceeds of the buyer’s mortgage.

As always, make sure to consult with a real estate professional about the restrictions of a claim before purchasing property that is encumbered.

Real estate encumbrance 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 are unlikely to be removed or litigated.

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

An encumbrance is a claim against a property by someone who isn’t the current homeowner. Encumbrances can limit how the owner uses their property, especially when it comes to the transfer or sale of the house and/or land that is encumbered.

It’s common for nearly every property to have at least one encumbrance on it. There are financial and nonfinancial claims, which can include easements, liens, leases and restrictive covenants.

If you’re ready to buy a home and become a property owner, start an application for a mortgage today. You can also speak with one of our Home Loan Experts at (833) 326-6018.