What Does "Encumbrances" Mean in Real Estate?

What Does "Encumbrances" Mean in Real Estate?

What Does "Encumbrances" Mean in Real Estate?

The standard encumbrance definition is “burden or impediment.” When it comes to the encumbrance real estate definition, it’s not that different. It’s a potential burden or impediment all right, as it involves some form of claim against a property by an entity other than the owner.

Common Types of Encumbrances

If you own real estate, it’s likely there is some form of encumbrance on your property. A mortgage is technically an encumbrance since it is a lien against the property. Until the mortgage is paid off, the lender has an interest in the property, and if the borrower fails to pay the mortgage, foreclosure by the lender may result. A mortgage, however, is not considered a potential burden since most home buyers carry them. An actual lien is another story. A tax lien is placed on a property when the owner hasn’t paid their taxes, and if it’s a federal tax lien, it has the primary claim on any assets held by a debtor. There’s also a judgment lien, which occurs if someone wins a lawsuit against the property owner. A lien is recorded on the property, and the owner may have to sell it to satisfy the judgment. However, the creditor only receives their money after the mortgage is paid off. Another type of lien, the mechanic’s lien, is filed on the property if someone did work on it and was not paid. The filer is generally a contractor, electrician or someone else performing a service.

Easements and Encroachments

Easements and encroachments are other forms of encumbrances. An easement is a right for another party to use the land. That may involve a utility company, for example, and lines for telephone, cable, water, sewer and electric. Most homes have some form of the utility easement. Such easements are for the greater good, but they may affect the way you use your property. You can’t plant huge trees whose roots may affect these lines in the easements. That also means the electric company can come along and trim existing trees on your property if the branches interfere with the wires. You can’t install a swimming pool, or even a goldfish or Koi pond, in an area with an underground easement.

While utility easements are the most common types of such encumbrances, there are other forms of easements. Some easements allow one property owner to access the neighboring property. In situations where a house is built behind another and doesn’t have its own road access, a driveway easement may be put in place. Such an easement should address whether both parties are responsible for driveway maintenance, such as snow plowing.

Encroachments occur when part of a property crosses over a legal boundary line. For example, one person may install a fence on part of their neighbor’s property, generally inadvertently. If a landowner doesn’t realize an encroachment has occurred, the issue may not come up until the land is sold. The property surveyor discovers the encroachment, and then the property owner must act in some fashion. This usually involves having whatever is encroaching on the land removed, or having the neighbor purchase the small strip of land on which their encroachment is located. However, any encroachment can create title problems when selling the property.

Restrictive Covenants

More often known as deed restrictions or conditions, or covenants and restrictions; restrictive covenants limit what a property owner may do with their property. They are often found in planned communities with a homeowner’s association. For example, a deed restriction may ensure that someone cannot open a commercial business in a residential area. Most home buyers are aware of those types of restrictions, but there are others that may take them by surprise if they don’t read their deed. Some communities may not allow homeowners to store large vehicles, such as RVs, boats or even a work truck, on their property. Many communities limit the types and numbers of animals kept on a property, so do your research before bringing home that pot-bellied pig. Some deed restrictions may not permit subdivision of a property, even if it is a large lot. Other restrictions include the size of the home, so adding on may not prove possible, the setback of fencing or even if you can place a garden shed on your land. While restrictive covenants are most often found on new construction in subdivisions, older dwellings formally recognized as historic have their own set of deed restrictions. You may end up quite limited in making any changes to the house that would alter its historic appearance. While deed restrictions are put in place to preserve property values, any of these restrictions can indeed become a burden or impediment to a homeowner, the traditional encumbrance definition.

Zoning Violations

Zoning violations on a property are also a form of encumbrance and require satisfaction before the property is sold. It’s critical to find out how a property is zoned before purchasing it so that you know the kind of changes you can or cannot make on it.

Emblements Crops

The emblements real estate definition involves legal protection to tenant farmers on an acreage. They are annual crops which are owned by the farmer even though grown and harvested on another person’s land. Only annual crops requiring tenant-farmer labor are considered emblements. Even if the property is sold, the farmer may complete that season’s harvest. If you plan to build a house and purchase a currently farmed field in which to construct your dream home, you can’t begin construction until after the harvest. If you are buying a home on which crops grow, keep in mind that the current harvest does not necessarily belong to you.

Lease Agreements

If you buy a property which has current tenants under a lease agreement, that lease is a form of encumbrance because, while you have title to the property, you can’t use it as you see fit. You must abide by the lease agreement during the term of the lease. State and local laws come into play when you buy a property with tenants, so find out the law in your area or contact a real estate attorney.

Researching Encumbrances

How do you find out about encumbrances on a property? The best way is via a title search. A title search, in essence, is the history of a property. You can visit your county recorder’s office to conduct the search, or just search online. If you are purchasing a property and have a mortgage, your lender will require a title search from a title company. The title search should turn up any encumbrances on the property. If there is an encumbrance other than the current owner’s mortgage, a utility easement or an HOA’s deed restriction, your lender will inform you since that could affect obtaining clear title to the property. The lender will refuse to give you the money unless the title is clear. Even if you can pay cash for a property, you should have a title search conducted. Down the road, you could find out that someone else has a legal claim to your property because the title was murky, or you may find the property virtually impossible to sell. If buying an HOA property, find out precisely what the restrictive covenants are before making a final decision.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.