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What’s An Encumbrance In Real Estate?

Jamie Johnson6-Minute Read
August 18, 2020

If you’re considering buying a home, you probably already know you need to perform your due diligence first. You have to research that property, get the home inspected for structural problems and negotiate with the seller on the price.

But one of the things you may have overlooked is possible real estate encumbrances. A real estate encumbrance is a claim against that property by someone other than the owner. It can affect the value of the home and how you’re able to use that property in the future.

At first glance, a real estate encumbrance sounds pretty intimidating. But the truth is almost every property in the U.S. has some kind of encumbrance on it.

From zoning laws to homeowners associations (HOA) to mortgages, there’s almost always going to be a limit to what an owner can do with their property. This article will explain more about what a real estate encumbrance is and the most common types to watch out for.

What’s An Encumbrance?

An encumbrance in real estate, which is also sometimes called an incumbrance, is anything that impedes what a property owner can do with that property. If you’re looking at purchasing a home, you need to know whether anyone else can make a claim about how the property is used.

An encumbrance can affect whether that property is eligible to be transferred to another owner. Encumbrances can include things like liens, deed restrictions, easements and leases.

These encumbrances can affect the person selling the property as well as the new owner. 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 reduce 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. But 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. And different types of encumbrances will have different implications for homeowners and prospective homeowners.

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

That’s why it’s important to understand the different types of encumbrances you may encounter. Listed below are five common types of encumbrances you should familiarize yourself with. 

Encumbrances By Law

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

 

  • Residential: Residential zoning laws usually apply to single family homes, condominiums, apartments, duplexes and trailer parks. These laws cover issues like whether mobile 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 and shopping areas. They can also put limits on real property, like buildings, 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.

Encumbrances Through Debt

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

For instance, a mortgage is a common example of a lien. Your lender has a lien against the 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.

Another example would be a mechanics’ lien, which 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 are another common type of encumbrance. 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 homeowner.

Encumbrance Through Easement

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.

Encumbrance By Deed Restriction Or Restrictive Covenant

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. In the past, these restrictions were used to prevent diversity in the community’s makeup.

However, those restrictive deeds and covenants have since been struck down. Today, restrictive covenants are most widely used by HOAs.

If you’re considering moving into a neighborhood that has an existing HOA, this is typically a good sign. HOAs exist to protect the property values in that neighborhood.

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 period 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.

Are Encumbrances A Bad Thing?

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

For instance, prospective home buyers interested in resale value should welcome encumbrances like HOA covenants and/or strong zoning laws. However, there are certain types of encumbrances you’ll want to avoid.

Some types of encumbrances can hurt the value of your property or put restrictions on how you’re able to use it. That’s why it’s important to do a thorough title search before purchasing a new home or property.

Most of the time, a title search will reveal liens or other encumbrances that could negatively affect the value of the property. If you find the property has any encumbrances, take the time to learn what they are before finalizing the sale.

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.   

Summary: Encumbrances Can Be Your Friend

An encumbrance is any type of claim against a property that was put in place by someone other than the owner. A first glance, encumbrances can seem like a bad thing, but this isn’t always the case.

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 should save you from any unpleasant surprises down the road.

If you want to learn more about homeownership or what to look for when you’re buying your first home, be sure to check out our Learning Center. It’s full of useful resources that’ll walk you through the home buying process.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.