What Is Encumbrance in Real Estate?

You might think that once you own the house, you can do anything you want. That's not entirely true. Encumbrances may limit what the owner can do with the property. While some encumbrances may not affect you significantly, knowing whether your property has any encumbrances is essential to protecting property value and your ability to use it however you want. Read on to understand encumbrance in real estate. 

Understanding Encumbrances in Real Estate

Encumbrance in real estate refers to any claim, lien or liability on a property that may limit or restrict the owner's rights to transfer or use the property for certain purposes. An encumbrance limits how a property owner can use real estate. A third party, such as previous owners, neighbors, utility companies or mortgage lenders creates an encumbrance.

An encumbrance can reduce property value, stall a sale or otherwise limit the title of a property. When buying a property, a key step is a title search. The title company will perform a title search, which verifies that the property has no encumbrances. Encumbrances are a right to the land held by a third party that encumbers your use, access to or sale of the property. 

If you find significant encumbrances in the title search that weren't previously disclosed, you generally have the right to back out of the transaction and recover your earnest money. In some jurisdictions, you may be able to seek damages for the delay.

Before running from any property with encumbrances, it's important to remember that most properties in the U.S. have at least one encumbrance or incumbrance. One of the most common types of encumbrances is an easement, which may grant a third party, such as a neighbor, access to some parts of the property. 

For example, your neighbor may have an easement that allows them to drive on your driveway to access their property. Another common easement within neighborhoods or planned urban developments is a common path to access a park, recreation space, lake or beach. 

Easements are far from the only encumbrance you may find on a property. Encroachments, liens, leases, mortgages and covenants may all restrict your property use. Some encumbrances can affect the value or marketability of a property, but owners actually favor some. For example, zoning laws that prevent commercial activity in neighborhoods are usually welcomed by owners. 

On the other hand, liens placed on a property that seeks repayment of debt can be a hassle that stalls the real estate transaction. In some cases, an encumbrance can affect the transferability of a property and restrict its free use until the current owner can lift it. 

Types of Encumbrances

You may encounter various encumbrances in real estate, from mortgages and liens to restrictive covenants. Here's how each of these can affect you. 

Encroachments

An encroachment happens when someone who doesn't own the property uses or interferes with the property. For example, a neighbor may build a fence over the property line. Even a garden or branches of a tree extending onto a neighbor's property is a type of encroachment. Major encroachments can include buildings extending onto a neighbor's property or squatters. While some encroachments are harmless, others can lead to liability issues, property damage or difficulty selling a property.

Easements

An easement grants a third party the right to access or use a portion of a property. An easement may give a neighbor the right to access their property through a portion of your land or the utility company to access utility lines on the property. Some easements, like a beach access path, may be designed to benefit the whole community. Many easements shouldn't significantly reduce the value of a property, but that depends on the specific type of easement and its effect on property use. 

Liens

Liens are a type of financial encumbrance on a property. Liens are debts incurred by owners that are lodged against the property. The most common liens are mortgage or mechanics liens, but you could also find tax liens resulting from unpaid taxes. 

A construction lien guarantees that workmen, such as construction crews working on the home, are paid if liquidation occurs. According to most purchase and sale contracts, all liens must be cleared before the seller has the right to sell the property. 

Leases

A lease agreement gives the leaseholder the right to rent a property at a set monthly price for a certain time. If a property is under a lease contract, the leaseholder has the right to continue residing in it even if it is sold. For that reason, if you purchase a property with a lease encumbrance, you cannot use or occupy the property until the lease expires. A leaseholder's right to use property in a particular way can’t be blocked by a new owner.

Mortgage

A mortgage is one of the most common types of encumbrance on a property, and it is a type of financial encumbrance. A mortgage allows homeowners to purchase a home and pay over time; the lender uses the home as collateral. This won't affect the occupants if the mortgage is paid on time. The mortgage encumbrance must also be cleared when the home is sold unless the new owner assumes the mortgage. 

Restrictive Covenants

Restrictive covenants, such as homeowners association (HOA) covenants, may restrict what you do to the property or prevent you from taking specific action on a property.  While restrictive covenants are common in neighborhoods with an HOA, they can preserve property value.

For example, an HOA may require that a home meet certain maintenance standards, such as frequent lawn maintenance. In some areas, they may specify the colors you paint the home or restrict what you can put in the front or back yard. 

How Do Encumbrances Affect Property Ownership?

Encumbrances can restrict property owners' rights by limiting their ability to sell, transfer or use the property. An encumbrance is a type of claim brought up by a party other than the owner that restricts what an owner can do with the property.

For example, if your neighbor has an easement to access their property through a driveway on your land, you cannot build a fence surrounding your land and blocking the driveway. Likewise, if there's a mechanics lien on the property, you may not be able to sell it until the debt is paid and the lien is cleared. 

How to Check Whether a Property Has Encumbrances

You can check for encumbrances on a property by conducting a title search or obtaining a property report from a title insurance company. Suppose there's some doubt about the property after a title search. In that case, you can speak with a real estate attorney who can provide guidance on clearing the encumbrance or suggest alternative solutions. 

How to Remove Encumbrances

Some encumbrances can be removed or released. For example, once a mortgage is paid off, the lender can release the lien on the property. Other encumbrances, such as easements or restrictive covenants, may be more difficult to remove and require legal action. Some encumbrances, such as utility encroachment or HOA covenants, may not be possible to remove.

Should You Be Concerned About Encumbrances When Buying a Property?

Yes, it is important to be aware of any encumbrances on a property when buying real estate. But because most properties have some encumbrance, it's not automatically a reason to avoid them.

A title search is essential to understand the types of encumbrance a property has and their effect on your home life. Some easements or covenants, like zoning regulations, may be in your favor. A tax lien from the IRS or other financial lien can be a sign that the owner must clear the debt before the sale can proceed. 

Any encumbrances that cloud the title or the transfer clarity are serious considerations. And an encumbrance that transfers someone else’s obligations onto you is a major red flag. That's why it's important to understand the types of encumbrances on a property and how they can impact or encumber you. 

Final Tips on Encumbrances in Real Estate

An encumbrance on a property means a third party has a right to the property that may affect the owner's use. You don't need to avoid encumbrances entirely, but you need to be aware of how they can potentially affect your use of the property. 

A thorough title search is essential to protect your investment and use of the property. It will ensure that you don't take on unexpected debt through liens or experience major restrictions to property use. As an informed buyer, research encumbrances and choose a property that can protect property value rather than restricting your use. 

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