What Is An Encumbrance In Real Estate?

When buying a property, you want to ensure there are no encumbrances against the property that can restrict your use of the property or the ability to transfer it. An encumbrance might be physical or financial when dealing with real estate. While sellers must disclose encumbrances, not all do – they might have forgotten about it or might intentionally try to hide an encumbrance on a property. A title search by a qualified title company will ferret out any encumbrances.

What Is an Encumbrance and How Does it Affect the Property?

In a nutshell, an encumbrance is a claim on the property by someone who does not have an interest in the property. Until the encumbrance is lifted, property usage is restricted. An encumbrance might and might not affect the value of the property – it depends on the encumbrance and how much of the property it covers.

In some cases, not just the value is affected. An encumbrance could create an unmarketable title, which means that you might not be able to sell the property. Even if you could sell the property, prospective buyers could back out of a contract if they were to find out you signed a contract without disclosing the encumbrance.

Common Types of Encumbrances

Several types of encumbrances exist. Some do not affect the marketability of a property, such as zoning laws, though they can limit your use of the property. Types of encumbrances include:

Mortgages and Deeds of Trust

When you purchase a property, the lender gives you a note. However, it is the mortgage that secures the note. The mortgage places a lien on the property, which means that you cannot sell it without paying the mortgage off.

Lenders will sometimes use a deed of trust, which is an agreement between a trustee, borrower and lender. As with a mortgage, you have to satisfy the deed of trust before you can sell the property.

Deed Restrictions

A private owner might restrict the use of his or her property for specific uses. The restrictions usually stay with the property when heirs or new owners take over the property. Deed restrictions could cause trouble on large tracts that are sold as one piece or subdivided into several smaller parcels.

Zoning

Most cities and counties have zoning regulations. Though most people do not think of them as such, they are also encumbrances on the property. For example, a property that is zoned residential cannot be used for a commercial business.

Liens

A property could have voluntary or involuntary liens. A voluntary lien is one you sign off on when you use your property for collateral. It gives creditors the right to seize your property if you do not pay the note or obligation for money you borrowed.

Involuntary liens include tax liens, mechanic's liens, and lis pendens. Any governmental entity can place a lien on your property for taxes that you owe. Federal liens are paid before all other claims and liens.

A mechanic's lien is one that a contractor or sub-contractor can place on your property if you did not pay for materials used to repair or build your property and work performed by the contractor or sub-contractor.

A lis pendens is a notice that means the filer is taking legal action against the property. You will commonly see a lis pendens when the ownership of the property is in question. You might also see a lis pendens during a divorce.

Leases

Leases your tenants sign place encumbrances on your property. Unless you have permission from the tenant to break the contract, you cannot sell the house while the lease is valid. A lease is an encumbrance because you cannot sell the property even though you still have title to the property.

Easements

Easements give others permission to use a portion of the owner's property. For example, properties with city utilities usually have an easement alongside the road for utility lines, including water and septic lines. The property owner is usually restricted from placing anything that would hinder the utilities' access to the property. An easement could give a neighbor permission to use two feet of your property for his or her driveway.

Restrictive Covenants

A seller can restrict the buyer's use of the property by writing the covenants into the deed. For example, a seller might require that the buyer leave the exterior of a building intact, such as in a historic zone. As long as the seller doesn't add any covenants that break the law, he or she can be as specific as he wants – as long as a buyer agrees.

Encroachment

When something encroaches on another property, the property sometimes becomes unmarketable. For example, if one property owner builds a fence and it veers onto another person's property, whether for a couple of inches or along the entire property line, it is an encroachment. Often, you cannot sell the property until you resolve the issue. The person who owns the property cannot use the land where the fence encroaches, and the fence builder does not have title to the property.

Love,

Kartik