What Is Encumbrances in Real Estate and Management Tips

First-time homebuyers have a lot to worry about. Disregarding the struggling real estate market, they must learn about things like adjustable-rate mortgages, closing costs, and potential homeowner associations.

However, one of the lesser-known roadblocks to a comfortablereal estatepurchase is the presence of any real estate encumbrances. Checking for these financial headaches ahead of time requires little effort and keeps you from investing in an encumbered property that’s more trouble than it’s worth.

What is an Encumbrance in Real Estate?

An encumbrance is a claim attached to a property limiting a homeowner’s control. These limitations usually come from an outside claim, lien, or liability that the previous homeowner never addressed.

However, there are also encumbrances like easements, encroachments, and zoning laws that limit your options from a practical standpoint rather than financial.

An existing encumbrance won’t prevent a legitimate title transfer, but it may lower the property’s value and prevent owners from leveraging the asset in other ways. Affected properties face trouble renovating, renting rooms, financing, or even planting certain plant species in the garden. These restrictions can significantly impactproperty ownership, making it difficult to sell or transfer ownership.

Types of Encumbrances

Encumbrances are broadly defined as anything that limits a homeowner’s options regarding their property. This vague definition means there are countless encumbrance types, some obvious from the start and others that you only learn about after living there for a while.

A common type of encumbrance is a financial encumbrance, which includes various liens such asmechanic's lien,tax lien, and lis pendens that are placed on a property to secure debts or obligations and potentially affect the property's title and sale.

Liens

Liens are claims against property that give the lien holder ownership of the asset if the debt isn’t paid. However, reclaiming the property is a last resort for most creditors, as they typically have more to gain from long-term payments.

If the property is seized, the claimant usually sells it to earn back a portion of the unpaid debt. This process is also applied to the government, which sometimes applies lienson real estate in lieu of unpaid taxes. To check if there are any claims against a property, it’s important to review thelien record.

Additionally, mechanic’s lien encumbrances exist when outstanding debts are owed to the contractors and vendors involved in the property’s construction.

Liens are a significant burden for fresh home hunters and will likely take a property out of consideration. Resolving this type of encumbrance should be the first priority for anyone attempting to sell their home.

Easements

Easements give another party limited rights over parts of a person's property. This party does not assume any ownership but can exercise certain privileges outlined in theeasement agreement.

Some easements are tied to a property due to local laws, while others are bought by the holder for defined rights. These agreements can be permanent and extend to new homeowners after the title changes hands.

A typical example occurs when a house is located at the far end of a street. That home’s tenants must cross their neighbor’s driveway to access the main road. This situation is a landlocked property and creates a necessary easement that prevents the neighbor from blocking their driveway.

Another scenario is when a utility company has an easement over a portion of the property, allowing it to run an electrical line underground. This prevents the homeowner from planting trees or putting anything over that strip of land.

Encroachments

Encroachment may be the most frustrating type of encumbrance. It happens when a third party builds a physical barrier on a property they have no rights over.

The most common offenders are inconsiderate neighbors who build fences or extend gardens past their property lines. These can be challenging to remove, especially if the structure is cement-anchored into the ground.

If theencroachmentlimits your property, the first step is to talk with your neighbor about removing it. However, after proving you own the land and the obstruction is within your property lines, you may need to get a court order.

Deed Restrictions

Restrictive covenants, also called deed restrictions, are inherent limitations written into thedeed property, controlling how the property can be used. These conditions can be as ridiculous as the seller wants if the buyer agrees.

However,deed restrictionstypically preserve an important or historical aspect the original owner cherished. The covenant may forbid painting over a child’s wall art or changing out classic window shutters.

On the other hand, covenants, conditions, and restrictions (CC&Rs) are terms used for deed restrictions set by a homeowner’s association. These restrictions are designed to protect property values in the area but are classified as encumbrances.

Leases

A lease is a rental agreement in which a property owner allows someone to pay to live at a property for a period of time. The agreement provides a minimum standard of privacy for the tenant and limits the homeowner’s access to the leased property.

Most leases will not automatically terminate if the title changes hands. New homeowners may be stuck with an unwanted tenant if the seller does not disclose that information.

Other Examples of Encumbrances

In addition to human-caused encumbrances, encumbrance real estate comes from city zoning laws or environmental protections. Many states have bans against cutting down or pruning trees with an active bird nest. Violations can result in substantial fines or imprisonment.

Zoning lawsmay also prevent homeowners from building a second home or rental unit in their backyard. There are frequent limits to the number of water, septic, or gas lines that can run through a property. These restrictions can impact the property's title and its marketability, leading to difficulties in selling or buying the property.

These characteristics may affect an individual buyer’s decision, but they won’t lower the property’s actual value. Most people search for encumbrances through title search services, but these tools don’t reveal these types of miscellaneous problems.

Managing Encumbrances

Properly managing and researching encumbrances is crucial for property owners and buyers. Checking for potential encumbrances will narrow your search and allow you to consider your future plans for the property.

If you want to build a fishing deck at the pond in your backyard, you must check on any zoning laws that would interfere with that dream.

If you’re big into gardening and native plant species, you’ll want to see who owns the fencing and other physical objects encroaching into the yard.

While not all encumbrances are financial, the most dangerous ones, like liens and easements, are. However, they are easily found in most countyproperty records. This means that a simple title search will reveal many encumbrances and inform your decision.

Negotiating

You’d be surprised; many people are more amenable to change than they seem. When you buy a house, you’re changing the relationship your neighbor had with the previous homeowner, which can impact theproperty sale. Maybe they got permission to push their fence boundary a few inches further.

Communicate with that sticky tenant and see what you can do to end their lease early. They might have nowhere to go and need more time to get packed and find a new living arrangement. While an existing lease may have blindsided you, a leaseholder might have also not been informed of the title change.

Legal Remedies

You may need legal remedies if you’re dealing with a particularly stubborn neighbor or nonsensical restriction. Taking someone to court isn’t a fun time, but neither is having an overgrown tree constantly dropping branches into your yard.

The most critical first step is to identify whether an encumbrance exists. Zoning laws, environmental codes, and property lines can be complicated to discern fully. It’s best to consult with a skilled real estate attorney to avoid making the neighborhood uncomfortable for no reason.

Encumbrances can be large or small hurdles in real estate transactions, affecting property rights, value, and usage. Staying aware and knowledgeable about the encumbrances attached to a property is essential for responsibly buying or selling a home. Avoluntary lien, such as a home equity line of credit, must be recorded as satisfied to allow the property to change hands.

Consulting with real estate professionals and attorneys can help resolve most encumbrance issues, whether it’s through cordial communication or legal force.