What is an Encumbrance in Real Estate? A Complete Guide

Encumbrances can significantly influence the value and marketability of a property. Familiarizing yourself with them will help you navigate real estate transactions with confidence. But what is an encumbrance in real estate? That’s a question you’ll need the answer to if you want to ace that real estate exam.

Continue reading this guide to easily grasp the concept of encumbrances and get ready for the real estate licensing test.

What Does Encumbrance Mean in Real Estate?

An encumbrance in real estate is any claim or interest in a property that isn’t held by the owner but still impacts the property.

Let’s say you own a home and decide to remodel your kitchen. You hire a contractor but fail to pay the final bill. Then, the contractor can file a type of encumbrance known as a mechanic’s lien against your property.

In this example, the contractor doesn’t own your property. Still, when they set the encumbrance, they restrict your ability to transfer it. You can only sell it once you pay the bill.

Always remember these key aspects:

• They are held by someone else or entities that aren’t the property’s owner, like a bank, a Home Owners Association, or a utility company.
• They impact the ability to transfer property and restrict their free use.

Some encumbrances, such as easements and restrictive covenants, come with the property title when sold, which means the new owner will also have to live with them. These are not temporary hurdles but long-term considerations in real estate transactions.

However, there are other types that can directly prevent you from transferring it until you deal with them. An example of this is liens.

Now that you understand the meaning of an encumbrance let’s learn the most common types of encumbrances against real estate property.

Types of Encumbrances on a Property

Encumbrances come in various forms, each with its own impact on property ownership and use. Here’s a breakdown of the most common types:

Liens

Liens are financial encumbrances that give creditors a claim to the property if a debt remains unpaid. It’s important to note that if there’s a lien, you cannot transfer, refinance, or sell the property without settling it first.

There are two main types of lien you should know about:

• Voluntary Liens: These occur with the property owner’s consent. A typical example is a mortgage. When you take out a mortgage, the lender places a lien on your property as collateral until the loan is fully paid off. The mortgage lien ensures that if you don’t pay the loan, the lender can foreclose and sell the property to recover their money.

• Involuntary Liens: These are imposed without the property owner’s consent, usually due to unpaid debts. For instance, a tax lien is placed by the government if property taxes are not paid. Another example is a mechanic’s lien, where a contractor who wasn’t paid for work done on the property files a lien to secure payment.

Easements

Easements are non-financial encumbrances that grant someone else the right to use part of your property. Unlike liens, easements do not involve money owed but still affect how you can use your property.

These are the kinds of easements you may find in your real estate exam:

• Appurtenant Easement: This type of easement involves two properties owned by different owners. For example, suppose your property has a driveway that your neighbor needs to access their property. In that case, they may hold an appurtenant easement on your land. This easement “runs with the land,” meaning it remains in place even if the property is sold.

• Easement in Gross: This easement benefits a person or an entity rather than a property. Utility companies often have easements in gross, allowing them to place power lines or pipelines across your property.

• Easement by Necessity: This is created by a court when a property owner needs to cross another person’s land to access their own property. For example, suppose a landlocked property has no direct access to a public road. In that case, the owner can obtain an easement by necessity.

• Easement by Prescription: An easement by prescription can exist when someone uses a property they don’t own without the owner’s formal permission and without their action against it. For it to be created, there must be continuous land use for a significant period, as defined by state laws.

Restrictive Covenants

Restrictive covenants are rules or conditions placed on a property to preserve the overall character of a community or neighborhood. These covenants are usually set by a homeowners association (HOA) or a developer and are legally enforceable.

Here are common restrictive covenants examples:

Usage Restrictions: These might dictate how to use your property, such as prohibiting commercial activities or short-term rentals.

Architectural Restrictions: These covenants can limit the type of construction or alterations you can make. For example, you might be required to maintain a certain style of architecture or use specific materials.

Aesthetic Restrictions: These are often focused on maintaining a uniform appearance in a neighborhood, such as requiring houses to be painted in specific colors or limiting the types of landscaping allowed.

Encroachment

Encroachment happens when someone intrudes on or interferes with a property, and then there’s a dispute. For instance, let’s say your neighbors are having a legal discussion because one of them built a fence trespassing on the other’s property. Until they solve that legal matter, both properties have an encumbrance.

Lease

In leases, the lessor or landlord gives the lessee or tenant the right to use their property for a certain amount of time. It is considered an encumbrance because the landlord retains the ownership of the property. Still, they limit their rights by renting it to another person.

Remember, an encumbrance exists if a non-property owner is interested in a property that’s not theirs. In this case, that person is the tenant.

Mortgage

A mortgage is a loan commonly used to buy a home or any other real estate property. However, its uses can extend beyond that. People also take mortgages for various purposes, such as home maintenance, making investments, or even funding other personal ventures.

When you take out a mortgage for a home, you’re borrowing money from a lender, typically a bank or financial institution. The lender keeps an interest on the property until the debt is paid off. If you fail to pay, the lender can take the property as a form of repayment, called foreclosure.

Mortgages are common types of encumbrances and, more specifically, liens. Because of that, you’ll need the lender’s consent to transfer your property.

Is a Homestead an Encumbrance in Real Estate?

A homestead exemption is a form of protection for homeowners that shields a portion of a property’s value from creditors. While it offers financial security, it can also be considered an encumbrance because it places certain restrictions on the sale or refinancing of the property.

Suppose you have a homestead exemption on your property. In that case, it might limit your ability to sell the property quickly if creditors need to be paid from the proceeds. This protection benefits the homeowner but adds an extra layer of complexity to real estate transactions.

How Do Encumbrances Affect Property Use?

Encumbrances can have various effects on how you can use a property. For instance, an easement might prevent you from building a fence in a certain area. At the same time, a restrictive covenant might limit the type of structures you can add to your home. On the other hand, Liens can make it difficult to sell the property until the debt is cleared.

Let’s say you want to build a pool in your backyard.

However, suppose an easement allows a utility company to access that area. In that case, you might be prohibited from constructing anything permanent there. This could limit your ability to use the property as you’d like.

How do you know if there’s an Encumbrance on a Property?

Encumbrances don’t show in a home appraisal. You’ll have to ask for a title search to know about them. In it, you’ll find information about the property’s record, including legal owners and if there are any liens or other encumbrances that may affect the property transfer.

As a real estate professional, knowing the encumbrances of the property your clients are interested in is essential. You must inform them about how they could affect their interests and the closing process. A good way to protect them from future claims or defects on the title is with title insurance.

Summing-up

Learning what is an encumbrance in real estate is vital for anyone preparing for the real estate exam. In the future, as an agent, being aware of any encumbrances like liens, easements, and restrictive covenants can make the difference between closing a deal with success or not.

For more in-depth content, explore other articles on the Lexawise blog. When you’re ready, join the Lexawise real estate exam prep to ensure you pass your licensing exam on the first try.