In basic terms, an encumbrance is a claim against or a hold on a property by someone who is not an owner. You can consider any limitation on property use as an encumbrance. An encumbrance can limit both the owner’s use of their property and potentially their ability to sell or transfer it.
Leases and mortgages are good examples of encumbrance.
A mortgage is an encumbrance upon the property that it finances. It designates the rights of ownership to the lender until the mortgage is satisfied (paid off). The owner can’t sell the property without lifting the encumbrance of the mortgage.
A lease is also an encumbrance since it limits the owner's use of the property. For example, if you own a home and lease it to someone, you can't just move in and live there. The lease confers the right to occupy the space on the lessee and precludes the owner from unfettered use of the property.
Tax liens are used to encumber property. A lien is placed on a property when a governmental agency endeavors to collect money owed. The owner can’t sell or refinance the property until the lien is lifted.
Not all encumbrances are financial.
An easem*nt is another encumbrance that may attach to a property. For example, the easem*nt might require that the owner allow access by a non-owner. The party benefiting from the easem*nt might be a neighbor with a right to use a private road. It could also be a utility provider with the right to build towers or other conduits.
Encroachment is an encumbrance. It is similar to an easem*nt but hasn't received an agreement. For example, if your neighbor asks for permission to use your private road, they need an easem*nt. In contrast, if the neighbor builds a gate blocking your road, that is an encroachment. Other encroachments are buildings the neighbor builds on your property without your approval.
Zoning laws and Homeowners’ Associations can encumber.
Local zoning laws may create an encumbrance. For example, if you buy a home in an area that is strictly "zoned" for residential structures, you can't turn the house into a retail business or tear it down and build a movie theater. Zoning restrictions may also prevent the owner from building more units, keeping goats or chickens, or removing trees.
Homeowners’ Associations (HOAs) have rules, typically called covenants, that create an encumbrance on the properties within the association’s jurisdiction. The restrictions can be large or small and are sometimes prolific. For example, the HOA covenant may preclude an owner from changing the landscaping, painting the exterior, adding outbuildings, or even keeping vehicles in view of the street.
Sometimes property owners seek changes in zoning laws or HOA restrictions, seeking to broaden their ability to use their property. The potential success of such an effort may depend on support from other owners with the same preference but can also be thwarted by opposing interests.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
FAQs
An encumbrance can impact the transferability of the property and restrict its free use until the encumbrance is lifted. The most common types of encumbrance apply to real estate; these include mortgages, easem*nts, and property tax liens. Not all forms of encumbrance are financial.
What does it mean when a property is encumbered? ›
If a property has an encumbrance, it can mean there is a limit on how the owner of that property can use it. Some encumbrances are implemented by the state or municipality in the form of zoning laws or environmental regulations.
What is the difference between a lien and an encumbrance? ›
A lien represents a monetary claim levied against property to secure payment—the settlement of an obligation from the property owner. An encumbrance is a much broader term, referring to any sort of claim against a property. Any lien is an encumbrance, but not all encumbrances are liens.
What is an encumbrance in real estate for dummies? ›
An encumbrance on a property title refers to any legal claim or restriction placed on real estate that can affect the property's use, value, and transferability. Encumbrances on title range from financial burdens, like mortgages and liens, to non-financial restrictions, such as easem*nts or zoning laws.
Why don t buyers like property with encumbrances? ›
An encumbrance can create a cloud on the title of a real property. This type of limit, if not properly disclosed prior to the purchase agreement, can allow the property buyer to back out of the sale and possibly seek damages in some jurisdictions.
What is the simple definition of encumbrance? ›
1. : something that encumbers : impediment, burden. 2. : a claim (such as a mortgage) against property.
What is the purpose of an encumbrance? ›
The purpose and main benefit of encumbrance accounting is avoiding budget overspending, by showing open commitments as part of projected expenses. Encumbrances are important in determining how much funds are available as a projected expense planning tool.
Which of the following is not an encumbrance on real property? ›
Final answer: The correct answer is lease, which is NOT an encumbrance on real property.
What does unencumbered mean in real estate? ›
Unencumbered Property is land that has no claims, liens, or mortgages registered against it.
What does free of encumbrances mean? ›
phrase. No one else having any rights over something. When property is owned by someone and nobody else has any rights over it, it is owned free of encumbrances. Most house purchases require the property to be sold free of encumbrances.
A lien is a legal claim against property that can be used as collateral to repay a debt. Depending on the type of debt owed, liens can be attached to real property, such as a home, or personal property, such as a car or furniture.
Which encumbrance would constitute a lien on a property? ›
Lien: A form of encumbrance that usually makes property security for the payment of a debt or discharge of an obligation. Judgments, taxes, mortgages, and deeds of trust are examples of liens.
Is encumbrance a burden? ›
A burden or serious concern is an encumbrance. Your being five feet tall could be an encumbrance when it comes to your dream of playing professional basketball.
What is the synonym of encumbrance? ›
encumbrance (noun as in burden) Strongest match. burden. Strong matches. albatross cross debt duty hindrance impediment load millstone obstruction responsibility saddle weight worry.
What does encroachment mean in real estate? ›
What Is Encroachment By Definition? Encroachment in real estate is defined as one property owner violating their neighbor's rights by building or extending some feature of their property that crosses over property lines onto their neighbor's property. Sometimes the encroachment is intentional.
Which of the following is a commonly found encumbrance? ›
Common types of encumbrances against real property include liens, easem*nts, leases, mortgages, or restrictive covenants. Encumbrances impact the transferability and/or use of subjected properties.
Which of the following best defines encumbrance? ›
Which of the following best defines “encumbrance”? Anything which affects or limits the title to real property.
What does encumbrance mean financially? ›
Encumbrance is an accounting term that represents a commitment to spend money for a particular purpose at some point in the future. For example, you may have entered into a contract with a supplier, via purchase order, to receive some good or service several months from now.
Is a lien an example of an encumbrance? ›
A lien, which is a form of encumbrance, gives a claim holder the legal right to seize the real or personal property of a borrower if they fail to satisfy an outstanding debt or obligation.
