Encumbrance

Encumbrance is a term you might have heard during your time as a real estate investor, but do you know what it means and how it can impact your property rights? Learn more about encumbrance and what you can do to protect against encumbrances.

An encumbrance is a claim against a property that limits the property owner’s rights. Encumbrances are held by a third party and may restrict the owner from using or transferring the property.

There are different types of encumbrances, including financial and non-financial encumbrances. There are also several subcategories of encumbrances within these categories, like mortgage liens, tax liens, easements, and restrictive covenants.

It’s important to figure out whether there are any encumbrances attached to the property you’re looking at before you finalize the transaction. These encumbrances could impact your ability to use or sell the home until you’ve corrected the cause of the encumbrance.

Let’s say you purchase a home with a mortgage lien on it. That lien will be on the home until the mortgage is fully paid off, which is something you need to consider as a buyer. Tax liens are also common as a result of unpaid property taxes.

Hard money loans are ideal for real estate investors, giving you fast access to the capital you need to start investing as soon as possible. However, it’s important to do your research on the property you’re purchasing to make sure there are no encumbrances attached.

Doing your due diligence in terms of encumbrances is even more important when you’re taking out a hard money loan. Encumbrances can have a significant impact on your investment, so you need to make sure there are no unpaid mortgage payments or property taxes before you assume legal responsibility for a property.

There are several different types of encumbrance — and it’s not always related to finances. In this section, we’ll break down the different types of encumbrance, what they’re caused by, and how to remove them from a property.

There are two main types of encumbrances: Financial and non-financial.

Financial encumbrances are more common and occur as a result of unpaid mortgage debt, unpaid property taxes, or a lien placed by a contractor who wasn’t paid for the work they completed. You can also have a tax lien placed on your property as a result of unpaid income taxes.

Non-financial encumbrances aren’t caused by unpaid bills. Instead, these encumbrances are caused by different types of zoning and contract-related issues:

• Easements: Easements give another party the right to use a portion of your land, often for utilities or access to the other party’s property.
• Leases: If a tenant is currently under a lease for a property, that lease must be completed before the encumbrance is lifted.
• Restrictive covenants: Restrictive covenants limit what can be done on your property.
• Encroachments: Encroachments occur when renovations or remodels lead to a part of your property encroaching on neighboring properties.
• Zoning laws: Zoning laws determine how properties can be used, which can restrict property owners’ rights.

You can remove financial encumbrances by remedying the financial problem that led to the encumbrance. For example, you can remove a tax lien by paying unpaid taxes — whether those are income taxes or property taxes. For a mortgage lien, you can simply pay off the remaining mortgage balance to remove the lien.

Non-financial encumbrances can be more complex, especially when it comes to zoning laws and restrictive covenants. Removing these encumbrances may involve a legal dispute with the local government.

Now that you know what an encumbrance is and how it relates to real estate transactions, let’s take a look at some real-world examples of encumbrances, how they impact buyers, and how they can be removed.

Let’s say you’re an investor who’s looking to purchase a single-family home to use as a rental property. Maybe you’re new to real estate investing, so you don’t take the time to research whether there are any liens on the property. After you purchase the property, you discover there are unpaid property taxes that you’re now responsible for.

As the current homeowner, it’s your job to pay unpaid property taxes to remove the lien — which is an encumbrance — from your property. If you don’t pay these property taxes, your home may be foreclosed on to recover the unpaid taxes.

In this example, we’ll pretend you’re trying to sell property to invest in something else. The only problem is, the property you’re trying to sell is restricted by zoning laws. As a result, the property value may be driven down because some buyers can’t use the property for their intended purpose.

There are no benefits to having an encumbrance on your property, but it is important to understand how encumbrances can impact you and what you can do about them. Here are some things to consider when you’re purchasing property:

• Encumbrances can either be financial or non-financial, and different types of encumbrances have different effects.
• Financial encumbrances can be removed from a property by paying off the mortgage, taxes, or unpaid contractor payments that resulted in the lien.
• You can use lien lookup tools to figure out if there’s a lien on a property before you finalize the deal.