You’re not the only person who has a say on what you can do with your property: encumbrances give outside parties the right to limit or restrict certain activities.
Sounds a bit unfair, right?
Encumbrances range far and wide; some can be as simple as a mortgage or as complex as a conservation easement.
Although the idea of an encumbrance might seem ominous, they’re not always a big deal, nor do they always require direct actions.
However, certain scenarios can negatively impact your property, and knowing when an encumbrance means serious business is important.
So, what is an encumbrance in real estate?
In this article, we’re going to talk about the big picture of encumbrances and all the nitty gritty details every homeowner should know about them–including how to identify encumbrances on your property and ways to remove them.
Without further ado, let’s get into it!
1. What is an Encumbrance in Real Estate?
An encumbrance in real estate limits or restricts how an owner can utilize their property.
These restrictions are brought on by third parties, such as financial institutions or city governments (occasionally, owners will place encumbrances on their properties).
Encumbrances, for example, could relate to zoning laws.
Certain zoning laws may prohibit homeowners from turning their residential houses into commercial buildings.
In this case, although there is a restriction on the house, most homeowners are grateful for such encumbrances.
Other examples can be more problematic, such as a lien.
A lien occurs when a financial institution has a legal claim or hold on a property due to an outstanding debt.
Until that lien is removed, homeowners may be restricted from refinancing or selling the property.
So, not all encumbrances are the same, and some don’t do any harm to the marketability of the property, while others can be devastating.
In fact, because there’s such a wide range of encumbrances, it’s very common to find homes that have one or more of them.
Let’s take a look at the main types of encumbrances and what each one means for a property.
2. What Are the Different Types of Encumbrances in Real Estate?
There are several kinds of encumbrances that can be placed by financial institutions, city governments, neighbors, and other parties.
Encumbrances caused by local regulations rarely impact a property in a negative way, but they still restrict what a buyer can do with that property.
Encumbrances caused by financial or legal reasons are often much more serious and can severely impact a property’s market value and the owner’s ability to use the property as a financial tool.
Here are the different types of encumbrances in real estate:
Liens
Liens come in several forms.
At the core, liens are placed on homes by third parties, such as creditors or other lenders, as collateral in case the homeowner is unable to pay back a loan.
For example, mortgages are a type of lien.
If the property owner can’t pay back the mortgage, the financial institution has the right to take possession of the property.
Additionally, liens can be placed by municipalities for unpaid property taxes.
Leases
Commercial and rental properties often have tenants that have signed a lease agreement for a certain amount of time.
Property owners cannot legally break the lease, preventing them from doing certain activities with the property.
Potential buyers of commercial and rental properties will want to have an understanding of all the current leases in place, as some of their plans may be hindered until the agreements are up.
Easements
Easements give another party the right to access certain parts of your property.
For example, there may be an easement that gives a utility company the right to install piping on your property.
Or there may be an easement with a neighbor, giving them access to your driveway so that they can access their house.
In the driveway scenario, you would not be allowed to build or place anything that blocks the neighbor’s access to their home.
Encroachments
Encroachments are a bit different than other types of encumbrances.
They refer to neighboring properties that are intruding on your property without permission.
Encroachments can range from overgrown trees to home extensions that go over your property line.
The severity of the encroachment will depend on how easy it is to solve the problem, and it will also decide how restricted you will be from fully utilizing your property.
Deed Restrictions
Deed restrictions refer to limits placed on deeds that determine how you can use the property or what you can do to it.
These restrictions can be placed by builders, local governments, or homeowner associations.
When a property is sold, the new owners still have to abide by the deed restrictions, such as keeping the house a certain color or building certain types of fences.
Zoning, Building, and Environmental Laws
Local governments may place zoning, building, and environmental laws that put encumbrances on a property.
Zoning laws determine what buildings can or can’t be residential or commercial; building laws require structures to follow safety standards to prevent harm; environmental laws may determine certain developmental restrictions, such as removing specific trees, to preserve local ecosystems.
These kinds of encumbrances usually do not affect a property’s value, and they may even benefit a home’s marketability.
So, as you can see, the question of what is an encumbrance in real estate can mean many different things in many different scenarios.
If you’d like to better understand the encumbrances associated with your property or a property you’re looking to buy, seek professional assistance.
3. Who Places Encumbrances on a Property?
The party that places an encumbrance on a property depends on the type of encumbrance.
Here’s a list of all the potential parties that could place encumbrances on properties:
Property owners: Owners have the ability to place deed restrictions on their properties.
They may do this to maintain architectural standards in the neighborhood, protect natural resources, limit future development, or for a variety of other reasons.
Neighbors: One or multiple neighbors may be granted easements that allow them to use a shared driveway or construct fences along property lines.
These easements put encumbrances on the properties that are now being partially shared.
Financial institutions: Banks, creditors, or any other financial institutions have the ability to put liens on homes for outstanding debts, such as mortgages.
Liens give these entities legal claims to properties in case debts aren’t paid back.
Governments: Governments at the city, state, and federal levels can put encumbrances on properties for a number of reasons.
Encumbrances may be placed due to zoning laws, unpaid property taxes, and nature preservation efforts.
Utility companies: Utility companies may be granted access to use sections of a property to install wiring or piping.
These easements can often be challenged; however, when a home is purchased with preexisting easements, the new owners have to abide by them.
Contractors: When contractors accept jobs, they will sometimes include liens on the property as part of the agreement.
Liens ensure the contractor will be compensated if the client is unable to pay for the completed work.
4. Are All Encumbrances on a Property Required to be Disclosed to Potential Buyers?
When owners are selling their properties, they are usually required to disclose encumbrances to potential buyers.
However, potential buyers should not rely on sellers to disclose all the nitty gritty details, especially if it could hurt the value of the home or building.
Sometimes, sellers aren’t required to present the encumbrances to buyers if the encumbrances are already on public record.
Before finalizing a deal, buyers should use real estate agents or lawyers to run a full investigation on the property to uncover any undisclosed encumbrances.
In some cases, sellers who did not disclose encumbrances could be sued and brought to court by the party who purchased the property.
So, buyers should not hide encumbrances to avoid costly legal action in the future.
5. How Does an Encumbrance Affect the Transferability of a Property?
Certain encumbrances can affect the transferability of a property.
The most common type of encumbrance to cause transfer complications is a lien.
If there are unpaid property taxes, mortgages, or other debts, sellers might not be legally allowed to transfer the property until those liens are resolved.
Other types of encumbrances, such as zoning policies, deed restrictions, or easements, will rarely affect the transferability of a property; however, they could decrease its value.
When owners are getting ready to place their properties on the market, they should ensure that there aren’t encumbrances that could delay or terminate a sale.
Potential buyers may withdraw offers if there are problematic encumbrances that would take a long time to resolve.
6. Can You Challenge an Encumbrance on Your Property?
If your property has an encumbrance, it can be challenged.
For the most part, when a property has a preexisting encumbrance that was properly documented, challenging it will likely be unsuccessful.
If, by chance, the encumbrance wasn’t documented correctly, you may have more ground to stand on, increasing the likelihood of having it removed.
Challenging an encumbrance can be a lengthy process that may require legal assistance.
So, you need to decide if the time, energy, and money are worth contesting a preexisting encumbrance.
On the other hand, you may find more success if a third party is attempting to place a new encumbrance on your property, such as a utility easement.
If a utility company wants the ability to use a portion of your property to install utility lines, you have every right to put up a fight, especially if there are other nearby properties that could also be used.
However, utility companies may argue that using your property is required to protect public health and safety, so avoiding the easement may require legal help.
7. Can You Build on Your Property?
Certain encumbrances could prevent you from building on your property.
Here are the most common types of encumbrances that could prevent building projects:
Easements
Easements give certain parties access to your property, and you will not be able to build anything that disrupts that access.
That could prevent you from putting a fence between neighboring properties or building extensions that go over utility lines.
Zoning laws
If the community has zoning laws that restrict what type of buildings are allowed, certain construction projects will be denied.
This could also dictate the size, shape, appearance, and usage of a structure.
Deed restrictions
Deed restrictions may prohibit certain parts of a property from being built on.
Additionally, the restriction may also determine what can be done to preexisting homes or buildings, such as their appearance and usage.
Encroachments
When a property has an encroachment, it means part of it will not be accessible.
This could be caused by overgrown vegetation on a neighbor’s property or structures that extend over property lines.
Encroachments may have to be dealt with before construction projects could begin.
8. How Can a Buyer Identify Potential Issues?
Now that you know how to answer the question of what is an encumbrance in real estate, it’s time to talk about how to identify encumbrances.
You could go about the process on your own; however, going through records and reviewing titles can be a bit confusing if it’s not your area of expertise.
Working with a real estate attorney or title company to check for encumbrances will ensure that no stone is left unturned, and your attorney will be able to offer advice if encumbrances are found.
The best way to identify potential encumbrances on a property is through a title search.
A title search should give you access to public records where you’ll see liens, deed restrictions, easements, or any other encumbrances.
Generally, you will need to go through a title search company or attorney, which could cost between $100 and $200.
A title search should be a step that all potential buyers take before purchasing a property.
If you fail to do so, you will be unaware of limitations and restrictions that may decrease the value of the property or prevent you from utilizing all of the land.
9. How Do You Remove Encumbrances?
Each type of encumbrance requires different steps for removal, and some can’t be removed at all.
Liens and encroachments tend to be the easiest encumbrances to deal with.
A lien can be removed by resolving debts.
If a homeowner has failed to pay property taxes, the lien will be removed as soon as the outstanding taxes are paid.
Of course, resolving liens can be more difficult depending on a person’s financial situation and the amount owed.
Removing encroachments can be done by negotiating with the party, such as a neighbor, that is encroaching on your property.
For example, if part of your neighbor’s landscaping extends onto your property, you could contact the neighbor and negotiate a solution.
If a solution can’t be met, an attorney may need to be brought in.
Some encroachment scenarios may be more difficult to solve, such as an extension of a building that crosses onto your property.
Leases, easements, deed restrictions, and limitations set by local governments are more challenging to remove.
In most cases, you won’t be able to remove these encumbrances as long as everything is documented properly.
However, you have every right to challenge any encumbrance on your property–just expect to go through a time-consuming and potentially expensive process.
Final Thoughts
So, what is an encumbrance in real estate?
Encumbrances come in all shapes and sizes.
These limitations dictate how owners can utilize their properties.
Some encumbrances can be attractive to potential buyers, such as zoning policies that restrict commercial buildings from being built in the community.
Other types, like easements, could be more of a deterrent.
Whatever the case may be, it’s important for both owners and potential buyers to fully understand the encumbrances that are associated with a property.
If you have any questions about encumbrances or if you want to find out what limitations are associated with a property, contact a real estate attorney for professional help.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.