According to the Cornell Law School’s Legal Information Institute, in real estate an encumbrance gives someone besides the owner a claim on an asset. Therefore, if you plan to count the real estate as an asset, you need to know what encumbrances could affect your property value.
The seller should disclose all types of encumbrances to home buyers before the sale. Although some encumbrances are the seller's responsibility, others affecting property ownership may be due to external factors, like zoning laws and regulations set by the homeowners association (HOA).
So, it would be best to do due diligence and hire a real estate attorney to examine encumbrances on any real estate asset to make sure you understand its true value.
How a Mortgage Is an Encumbrance
A mortgage is one of the most common types of encumbrances. That’s because the borrower has pledged the property itself as collateral for the mortgage, and the lender has the right to foreclose on the property if mortgage payments aren't made.
While this obligation falls on the owner and not on the buyer, a buyer should ask if mortgage payments are current. A creditor could be considering a foreclosure that would stop the sale of the property.
How Contractor Liens Can Limit You
If a property owner fails to pay a contractor for repairs or remodeling, that contractor can place a lien on the property. This means that when the property sells, the contractor gets paid out of the proceeds. A mechanic’s lien is a variation of such a lien.
The owner must pay these liens, but you must insist that such payments be included in the purchasing contract. It's important to remember that the liens are on the property and not the owner, so a contractor could come after you if the owner fails to pay at the time the property sells.
Tax Liens Pose Severe Restrictions
A federal, state, county or city taxing agency can place a lien on a property for back taxes, such as property taxes. These agencies take first position, meaning the taxes must absolutely be paid when the property sells. So, you need to make sure your contract specifies that the seller will pay off any tax liens when you buy the property, or you could be strapped with a tax liability the moment the real estate becomes yours.
The taxes are always back taxes, so make sure the seller has not raised the selling price to pay off taxes that should have been paid long ago. If you pay a higher price because of back taxes, this means that you are paying the tax instead of the seller.
Lawsuits Are Legal Encumbrances
A court can place judgement liens on a property to satisfy a lawsuit. In other words, you could end up buying the property, then giving it to the plaintiff in a case. The court judgment would take precedence over your rights as a buyer, and you would have to sue the seller to get your money back.
This can cause problems when a lawsuit is pending and the seller does not disclose it during real estate transactions. A pending lawsuit may not have an encumbrance in place yet, but the suit would still outweigh your rights as a buyer.
How Easements Restrict Home Ownership Rights
The Cornell Law School's Legal Information Institute explains that easements are grants that give an easement holder a right over someone else’s property even if they don’t own it, and thus, enables them to use it with permission or have a say in how it is used. It’s common for condominiums. As a result, they are also real estate encumbrances.
An easement holder with affirmative easement rights has the permission to do something on the grantor’s property. For example, they could have a right to use the property’s footpath. On the other hand, those with negative easement rights have a right to prevent the property owner from doing some things on the property they own. For example, the property owner may be prevented from building a home over a specified height to prevent the blockage of beautiful views.
On the other hand, an easement in gross is a type of easement that applies for the benefit of someone or an entity, instead of the property. Once that person is gone, the encumbrance ceases to exist.
Therefore, you need to know what you can or cannot do with your real property assets and how much rights other people have to determine how you can use them.
How Leases Are Temporary Encumbrances
A property owner may lease out their property to another party in exchange for money for a specified period. So, the Cornell Law School's Legal Information Institute indicates that any lease can act as an encumbrance if you want to take immediate possession of a real property asset because you will not have a free or clear use of the property during the lease period unless you buy out the lessee.
How Restrictive Covenants Can Be a Nuisance
A good example of deed restrictions is restrictive covenants. According to Court House Direct, these are usually placed by sellers within the deed to restrict how the new buyer can use the property, even though the seller no longer holds the title.
For a restrictive covenant to be valid, it must be legal according to current laws and both parties must agree to it. For example, if both parties agree to leave a historic building standing on the property, that would be legal.
Encroachments Are Illegal Encumbrances
An encroachment involves an intrusion into an owner’s property lines without permission. An example is if someone illegally lives in your garage without permission or paying rent. If you own an encroached property, the use of that asset will be limited until you resolve the situation.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.