What are Encumbrances in Real Estate?
Encumbrances are quite common in real estate transactions, and because they affect the legal right of a person to buy or sell properties, every real estate enthusiast needs to understand them.
Although encumbrances mainly come as monetary claims, some are more about property control than debts. These could be seen as land use covenants or government restrictions.
In this article, you would get to know what an encumbrance is, the various types of encumbrances, and how to discover and remove them to avoid complications down the road.
What is an Encumbrance of a Home?
In real estate, an encumbrance refers to any claim on a property that prevents its owner from fully utilizing and benefiting from it.
This claim is usually placed by a third party who is not the owner of the property. Claims like these, when filed, can restrict and limit the ownership and/or use of the property.
An encumbrance on a home could be a result of anything, ranging from a loan agreement to a type of restricting license.
Depending on what type it is, legal processes may be necessary to address encumbrances. The existence of an encumbrance on a home has major consequences that could prove unpalatable for homeowners. Some of these effects are:
Limitations on Ownership
One effect of encumbrances is their limitation on ownership. This can result from a debt, legal contract, or a transfer of property ownership when given as a gift.
In cases where an encumbrance limits home ownership, the home is owned by the lessor or creditor, and the homeowner is subject to the limitations specified in the agreement or deed. These limitations prevent property sale or transfer of ownership by the homeowner.
Unmarketable Property Title
If extremely restrictive, an encumbrance on a home may make the property's title unmarketable. This simply means that the property cannot be sold or bought.
As a result, it is extremely important for anyone looking to buy or sell a house to carry out findings into the property’s title to make sure it is not in any way encumbered.
What Are the Types of Encumbrances in Real Estate?
There are various types of encumbrances in real estate. However, all of them have the same effect -create restrictions on a property.
Here are the four most common types of encumbrances that can be found on real estate properties:
An easement is a permission given to another party that grants them access to the home owner’s property for a specific purpose. It is created by an easement deed that is recorded in the public records of your county and becomes part of the title.
Easements sometimes ensure public services are available to all and are sometimes voluntarily granted to help another person.
For example, a landowner may allow a neighbor to construct an on-site well to avoid the cost of extending sewer lines to the property, or a driveway could be constructed through a person’s property to provide easy access to another location.
An encroachment occurs when a part of the property extends beyond its boundary and onto another property. This is often unintended and may not be detected until a survey is conducted.
Encroachments can be resolved simply by one landowner offering to sell part of the land which has been encroached on to the other landowner. If this offer is refused, legal actions can be taken.
An example of an encroachment is when barns, fences, backyards, and sheds stretch beyond their boundaries into someone else’s property.
Deed restrictions are contractual promises that bind a buyer to be subject to certain terms and conditions on a property.
These encumbrances may include a conditional purchase agreement when a buyer does not have enough money to purchase the property and needs financing, and very often, they determine the property's legal use.
An example would be a restriction that prohibits the construction of certain structures on a property.
Generally, if a deed restriction is too restrictive, many buyers may be unwilling to purchase the property.
Liens are one of the most common types of encumbrances in real estate.
If a property owner defaults on his mortgage payment, then a financial claim called a lien will be issued against the property.
This is to assist the creditor -banks or other mortgage agencies- to get back their money.
An example of a lien is when a court order that transfers ownership of the property to the creditor is issued.
How To Find Out if a Property is Encumbered
Knowing if a property is encumbered is important to understand the restrictions and determine if they wouldn't interfere with your real estate plans.
The following are a few ways through which you can find out if a property is encumbered.
Conduct a Title Search
A title search is an investigation into the history of a property to ascertain and reveal any claims or restrictions and who the legal owner is. A title search reveals every detail about a property, including its transfer of ownership over the years, making it one of the best ways to discover if a property is encumbered. To carry out a proper and in-depth title search, it is best to hire the services of a title company.
Consult a Real Estate Attorney
Another way to learn more about the encumbrances on a property is to talk to a real estate professional.
A good and experienced real estate attorney will be able to detect and interpret any encumbrances on a property, as well as advise you on whether the property should be purchased or not.
How Can You Remove an Encumbrance?
Removing encumbrances is essential to the full utilization and benefits of your property. There are different ways to remove encumbrances, depending on the type.
In some cases, it could be as simple as destroying a structure from the property, while in other cases, it could be complicated enough to require legal action.
In the case of a lien, if the homeowner pays off the mortgage, a deed of reconveyance will be issued. This deed transfers ownership of the property from the lender to the borrower. Likewise, if it is an encroachment, reconstructing boundaries or purchasing the encroached land should remove the encumbrance.
Are Encumbrances a Bad Thing?
Although encumbrances may appear to be terrible because of their restrictions, they serve to safeguard the property and can be advantageous to both owners and buyers.
Sellers who fail to disclose encumbrances to potential buyers expose themselves to severe legal action and buyers who fail to take note early may need additional funds to remedy encumbrances.
Final Thoughts on Encumbrances
Encumbrances are one of the many ways the real estate industry regulates and monitors the sale and purchase of properties to ensure equity.
Understanding the different types of encumbrances will enable you to make informed decisions regarding buying or selling properties.
It will also provide you with an easy way out when you find yourself with an encumbered property on your hands.
Real estate encumbrances are common limitations on a property. So, what exactly are they and how do they work? Watch this video above to learn about the types of real estate encumbrances and their functionality in the industry. Subscribe here!