What does encumbrance mean in the real estate industry?

There’s more to property ownership than just making an offer, signing a purchase order, securing financing, and closing the deal. Beneath the surface—sometimes literally—there can be hidden challenges many buyers don’t consider. One such challenge? Real estate encumbrances.

What is an encumbrance, you may ask? This means a third party has an interest/right to restrict the functioning of the property, including a real estate sale.

You can find different types of encumbrances in the real estate industry. These could range from ordinary ones like mortgages to more unconventional legal or financial obligations tied to a property. While some encumbrances may not completely hinder a sale, they can create obstacles to owning the property. Hence, it becomes crucial for prospective homebuyers to comprehend the concept of real estate encumbrances and understand the potential effects on their property purchase.

What is an encumbrance in real estate?

The simple encumbrance definition refers to any financial claim on a piece of property. This frequently originates from financial difficulties such as unpaid debts. 

The encumbrance is a claim usually made by a non-owner who limits the usage or sale of a property due to taxes owed, money owed to a vendor, or issues with the previous owner’s mortgage. Needless to say, these obligations act as obstacles that impact the ability to transfer ownership of a property.

Sometimes, an encumbrance can be due to zoning laws or environmental regulations. For example, suppose the owner of the property in question is renting it out or conducting business activities on it. The government or local authorities may implement an encumbrance on it to limit such operations.

An encumbrance can make it difficult to sell or buy real estate. Remember that an encumbrance often transfers with the property – becoming the new home buyer’s responsibility to deal with. If you’re contemplating owning such a property, STOP and RETHINK. 

What is a good example of an encumbrance?

Suppose a homeowner had carried out a home improvement project such as a kitchen remodel. They didn’t pay the general contractor the promised amount. The latter files a mechanic’s lien on the property. This claim for payment is on the house, not on the homeowner. The house in question will continue to be an encumbrance until someone pays the full bill amount. It becomes difficult to sell the house as the responsibility for the debt will transfer to the new homeowner. And no one wants that.

What are the different types of encumbrances?

Various types of encumbrances can impact a residential property. While not all encumbrances are necessarily deal-breakers, they invariably impose restrictions or limitations of some nature.

Keep in mind that there can be additional types of financial encumbrances based on local laws and regulations. It’s always advisable to consult with a qualified real estate professional or attorney to fully understand how an encumbrance affects a particular real property.

Here are some common types of encumbrances:

• Home mortgages: A home mortgage is a loan secured by the property itself. It gives the lender a legal claim to the property until loan repayment. If the borrower defaults on the mortgage, the lender can initiate foreclosure proceedings to sell the property and recover the money.
• Easements: An easement is a right granted to a person or entity to use a portion of another person’s property for a specific purpose. For example, a utility company may have an easement to access a property to maintain utility lines. Easements can also include rights of way for access or drainage.
• Liens: A lien is a legal claim or hold on a property as security for a debt or obligation. It can be on a property by a creditor to ensure payment. Common types of liens include tax liens, mechanic’s liens, and judgment liens.
• Covenants and restrictions: These are limitations on the use of a property, often imposed by a homeowners association (HOA) or through recorded deed restrictions. They may include rules regarding property use, architectural guidelines, or restrictions on activities such as running a business.
• Encroachments: An encroachment occurs when a structure on one property extends beyond the property boundaries and onto another property. It can be a fence, a building, or any other physical structure. Encroachments can cause legal disputes between neighboring property owners.
• Restrictive covenants: These are contractual obligations that limit how a property can be used. They are often put in place by a developer to maintain a specific character of a neighborhood. For example, there may be restrictions on the minimum size of houses in an area.
• Leasehold encumbrances: When a property is on a lease, the owner retains ownership but grants certain rights to the tenant. These leasehold encumbrances can restrict the owner’s ability to use or sell the property until the lease term expires.

How do you find out if a house/property is under encumbrance?

Performing a title search enables you to uncover any encumbrances associated with a property. In case you remain uncertain about a property even after conducting a title search, consult a real estate attorney. They can offer legal advice and assistance on how to handle the situation effectively. Additionally, getting title insurance is a viable option. This will safeguard you against potential encumbrances that may arise during the purchase process.

Last thoughts: Should you buy an encumbered property?

Here’s the truth: most properties have some type of encumbrance, whether it’s an easement, HOA restrictions, or even a recorded purchase order tied to prior improvements. Not all encumbrances are deal-breakers, but understanding them is key.

For example, a utility easement may be no big deal. However, a tax lien or unresolved mechanic’s lien could mean serious trouble down the line.

If an encumbrance clouds the property’s title or creates ongoing legal obligations, it might be wise to walk away—or at least renegotiate the terms before you buy.

Final Thoughts

Understanding encumbrances is a vital part of being a savvy homebuyer or property investor. From liens and easements to restrictive covenants and encroachments, each type of encumbrance can affect the value and usability of a property in different ways.

Before moving forward with a real estate deal, always perform a title search and ask questions—especially if the property’s history includes construction projects, legal disputes, or unresolved debts. Whether it’s a pending purchase order or a surprise lien from years ago, knowing what you’re walking into ensures you won’t be stuck with someone else’s baggage.

By being informed, you’ll be better prepared to protect your investment and move forward with confidence.

Written by Ramona Sinha. July 22, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.