If you’re buying a new home, you might have heard of the term “encumbrance.” An encumbrance is a claim on your property by a third party. Depending on the nature of the claim, it could affect your home’s resale value in the future. As a result, it’s important to do your due diligence before buying a house so that you can be aware of any encumbrances in advance.
It might sound like an encumbrance is a bad thing, but that’s not necessarily the case. There are so many types of encumbrances that it’s almost impossible to find a property without at least some restrictions on what you can do with it. Let’s talk about the most common types of encumbrance in real estate and how they work.
What Is An Encumbrance In Real Estate?
An encumbrance is a claim that limits how a property owner can use their property. This claim belongs to a third party, who can either be an organization or an individual. Organizations can include local governments, utility companies, and homeowners associations. Individuals could include neighbors or other people who have a right of way.
Types Of Encumbrance In Real Estate
Different types of encumbrance will have different effects on what you can do with the property. For example, HOA rules might dictate what paint colors you can use, or where you’re allowed to park your car. An easement, on the other hand, could give utility workers the right to access underground lines beneath your property. Types of encumbrance include:
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Legal Encumbrances
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Financial Encumbrances (Liens)
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Encumbrance Through Easement
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Encumbrance By Restrictive Covenant Or Deed Restriction
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Encroachment
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Leases
Each type has its own implications for your property. Let’s take a closer look at each of them.
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Legal Encumbrances
Legal encumbrances are restrictions imposed by law. This can include federal or state laws, such as environmental regulations. For example, you might own some protected wetland, where you’re not allowed to build permanent structures.
That said, the most common type of legal encumbrance is local zoning law, which defines the type of use a property is approved for. Local laws vary, but zoning laws generally divide real estate into three categories:
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Residential zoning means that a property is meant to be lived in. This includes single-family homes and duplexes, apartment buildings, trailer parks, condominiums, and co-ops. Residential zoning usually comes with noise restrictions, specific smoke detector rules, and other similar regulations.
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Commercial zoning means that the property is meant for business activity. This can include shopping centers, office buildings, hotels, warehouses, or industrial use. Different commercial zoning laws can limit the distance between the same type of business, and certain business activities may be banned altogether. For example, many towns ban the sale of alcohol, so even in a commercially-zoned area, you couldn’t open a liquor store.
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Mixed use zoning refers to any combination of commercial and residential use. The most common example of this is in urban areas, where buildings often have shops on the ground floor and apartments on the upper floors.
Financial Encumbrances (Liens)
A financial encumbrance, better known as a lien, is any claim on a property that was used as collateral for a debt. The most common type of lien is a mortgage lien. If you fail to pay your mortgage, your lender can take you to court, and eventually seize your property and sell it to cover the debt. Other types of liens include:
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Tax liens (unpaid property taxes or assessments)
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Mechanics’ liens (debt to a contractor or subcontractor)
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Judgement liens (liens imposed by a court as part of a judgement or settlement)
Regardless of the type of lien, it will need to be paid off before you can sell the property.
Encumbrance Through Easement
An easement gives someone other than the property owner the right to use the land. Easements are created for a specific purpose and are normally limited in scope. For example, you may give a neighbor an easement to use a path at the edge of your property to access a public park.
However, the most common types of easements are given to public and private utility services. These can include power lines, gas lines, drainage ditches, and access for utility workers who are doing their jobs.
Encumbrance By Restrictive Covenant Or Deed Restriction
Deed restrictions are sometimes known as “conditions, covenants, and restrictions,” or CC&Rs for short. These are commonly used in homeowners associations and are normally designed to maintain a certain character in the neighborhood. You might have restrictions on paint color, house size, parking areas, and other details.
Encroachment
An encroachment is a building or installation on another property that extends onto your property. Typical examples are garden sheds and fences, which can easily cross a property line by inches or feet. This often happens by accident and is not even discovered until one of the property owners commissions a survey.
If the encroachment doesn’t bother you, you don’t have to do anything about it. You will, however, need to disclose the encroachment to any buyers, and if the encroachment bothers them, it can stop a sale in its tracks. The easiest solution is often to work with the encroaching neighbor. They might be willing to buy the strip of land they’re encroaching on. If they’re not willing, you’d have to take them to court.
Leases
A lease gives the tenant the right to use the property for the duration of that lease. If a landlord sells their property, the lease is still enforced, with the tenant making payments to the new property owner instead. If you buy a property that’s being leased out, you’ll have to continue renting it to the current tenant, at least until the lease runs out.
How Do I Find Out If A Property Is Encumbered?
The easiest way to find out if a property is encumbered is to run a title search. A title search is part of routine due diligence, to begin with, and should turn up any encumbrances that come with the title. Then again, these public records can be confusing for the uninitiated. If you’re not clear about the encumbrances on a property, reach out to a realtor or real estate attorney.
Are Encumbrances Bad?
In and of themselves, encumbrances are neither bad nor good. They outline limitations on your rights as a homeowner. Some encumbrances are beneficial. For example, if you want to maximize resale value, buying a home in an HOA is a great way to do it. Meanwhile, residential zoning restrictions benefit everyone in the neighborhood by keeping down noise and traffic.
That says, there are some encumbrances you might want to avoid. For example, high-voltage power lines and the accompanying easement can negatively impact your home’s value. But if you’re looking to get a good value on a large property, even those kinds of “undesirable” encumbrances can be a benefit.
Summary
Encumbrances in real estate are a little-known aspect of the industry that exist in every deal. Almost every property comes with at least one encumbrance, and there might be several. Whether this is good, bad, or indifferent depends on the type of encumbrance, as well as how you want to use the property. By doing your research in advance, you can find a property without any undesirable encumbrances; perform your due diligence, and everything will work out fine.
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