The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
You’ve found the perfect home and you’re ready and willing to put in an offer to make it your own. There’s just one problem: There is an encumbrance on it.
What does that mean exactly? As the name suggests, an encumbrance is an interest or right, held by a third party, that encumbers — impedes, hinders or burdens — the function or activity of something (like a property) or some transaction (like a real estate sale). It sounds ominous, and it can be.
But not all encumbrances are created equal. Some are as mundane as a mortgage. Others can be more unusual, indicating legal or financial claims against a property that, if they don’t impede a sale outright, can make it harder to sell and less appealing to own.
That’s why it’s important for home-hunters to understand what a real estate encumbrance is, the different kinds of encumbrances, and how they might impact your purchase of a property.
What is an encumbrance in real estate?
There are a number of types of encumbrances, but in real estate they all largely mean the same thing. “An encumbrance is a claim that someone [a non-owner] has on a property of another,” according to Benjamin Dixon of the New York City-based Mackay Dixon Team at Douglas Elliman. “Encumbrances can arise due to taxes owed, amounts owed to mechanics or other vendors, or even the prior owner’s mortgage.”
If a property has an encumbrance, it can mean there is a limit on how the owner of that property can use it. Some encumbrances are implemented by the state or municipality in the form of zoning laws or environmental regulations. These often restrict certain types of construction on a property, or other uses of/operations within it (like if you rent it out or run a business from it).
However, when they refer to “encumbrances,” real estate pros usually mean some sort of financial claim, often stemming from financial troubles: a lack of payment of a debt, for instance. These can create different challenges, affecting the transferability of a property.
As a result, they make it more difficult to sell and less appealing to buy, because they often turn into the buyer’s responsibility to deal with. “They often transfer with the property, so it is important to ensure they are cleared prior to taking ownership,” explains Dixon. “No one wants to buy someone else’s problems.”
Example of an encumbrance
Let’s say a homeowner has failed to make a number of payments to a creditor — a general contractor who did a gut renovation on the house. This creditor files what’s called a mechanic’s lien (a claim for payment for work done to repair or improve a property) on the home. Note this claim is on the home, not the homeowner, and it stays in place until someone pays the bill. This sort of financial encumbrance may make it difficult to sell the house, because the responsibility for the debt would transfer to the new owner. Not the sort of fixture a buyer has in mind.
Different types of encumbrances
There are a number of different types of encumbrances that may affect a home. You’ll likely find at least one encumbrance with any property. Not all encumbrances are deal-breakers, but they are all restricting or limiting in some way.
Financial encumbrance: Liens
“A lien is a type of monetary claim against a piece of real estate,” explains Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding, a Bloomfield, New Jersey-based firm. “Its purpose is to secure a debt or obligation incurred by the property owner and, as such, affects the title to the property.”
A lien on a property means that if a financial obligation isn’t met within a certain period of time, the creditor may seize the property and sell it in order to recoup the money owed. It can also mean the creditor’s debt must be satisfied before the property can be sold.
Technically, a mortgage is a lien: It represents a lender’s claim on a property, should you default on your debt. Usually, that’s no big deal, as the seller of the home typically pays off their mortgage lender during the closing with the buyer’s money. But with other sorts of property liens, the property’s title is no longer clear, preventing the seller from concluding a sale — or necessitating that the buyer address the lien.
Legal encumbrance: Zoning
Legal encumbrances are limits that are put in place by governments. Zoning laws are one common example of a legal encumbrance and may be the reason that you live next door to other families rather than a business. Legal encumbrances might restrict you from building certain structures on your property, like an accessory dwelling unit, without getting permission to do so. They might also limit the types of water, septic or power systems that your property can utilize if they don’t comply with environmental regulations.
Some real estate pros don’t categorize zoning regs as encumbrances so much as restrictions on use by operation of a law, applying to all properties in a specific area — as opposed to being a property-specific issue.
“An easement refers to someone’s right to use real estate owned by another party,” DeMarkey explains. It’s generally a specific or limited use or purpose.
There are two types of easements.
- Easements in gross, which allow your property to be used for a specific purpose but don’t affect the ownership of it. These often involve utilities. A gas company can place pipelines or an electric company can install power lines on your property, for example.
- Appurtenant easements, which come into play when there are two properties that have shared space. “A common example is building a driveway that runs through a neighbor’s property,” DeMarkey says. Or, a path that runs through home’s backyard to a public park, or a set of stairs going down to the beach.
An encroachment, as the name suggests, is when someone who doesn’t own a property interferes with it in a physical way. Encroachments can often lead to legal disputes. “For example, if the corner of the house is across a surveyed boundary line, the owner of the encroached upon property could file a lawsuit for damages or compel the other owner to eliminate the encroachment,” DeMarkey says. If unresolved, these problems can create title transfer issues.
Technically not an encumbrance, though it does amount to a limitation, a restrictive covenant is to an agreement to follow the rules of a given community. Homeowners associations often set rules that all homes within a given neighborhood are expected to follow. These can also be placed on new constructions to make sure that every home in a new development follows specific standards.
A lease is an agreement between the property owner and a renter that allows the latter to use the property for an agreed upon period of time. Leases can guarantee the leasee won’t be affected by the sale of a property, at least for the duration of the lease. The renter has the right to continue to use the property under the terms of the lease.
Why should I know if a property is encumbered?
It’s important to understand what encumbrances a property might have before making an offer so you are fully aware of how you or others can use it — and/or what problems you might be buying. Or even if it is legally up for sale at all.
How to find out
You can find out the encumbrances on a property by performing a title search. If you’re still unsure about a property after performing a title search, consider talking to a real estate attorney who can provide legal advice and guidance on how to deal with the matter.
You can also purchase title insurance to protect against certain types of encumbrances that might arise during a purchase.
Should I still buy an encumbered property?
Just about every property has some form of encumbrance. The key is to know what sort of encumbrance it is, and what sort of effect it’ll have on your purchase and your life in the home.
You may not be bothered by a legal encumbrance like a zoning regulation. But you might indeed have a problem if there’s an IRS lien or a property tax lien on the home. Such financial encumbrances in particular can create challenges for both home sellers and homebuyers, meaning extra expenses at best or blocking closings at worst. You want to steer clear of anything that clouds the title, or transfers someone else’s serious obligations onto you.
Encumbrances can be frustrating, time-consuming and sometimes even costly to deal with. But you should not walk away from an encumbered property simply because of its status. Make sure you understand exactly what the encumbrance means — and how it will encumber you.