An encumbrance is any legal interest held by someone other than the owner of real estate.  An encumbrance is not an ownership interest.  Instead, it is more like a duty owed by the owner to a third person or persons.  Encumbrances easements, deed restrictions, liens, assessments, and taxes.

 

Right of Sale Not Affected:

Because an encumbrance is not an ownership interest, property subjec to an encumbrance may be bought or sold subject to the encumbrance.  The purchaser of the property, however, will be bound by the encumbrance unless released by the party holding the encumbrance.

A purchaser should inquire as to any encumbrances on the property before they purchase.  However, in most states a seller is required to disclose any and all encumbrances.

Types of Encumbrances:

It may be easiest to think of encumbrances as coming in two basic flavors:  1) Liens (such as mortgages); and 2) Limitations (such as easements, covenants, and restrictions).

Easement:  An easement is a non-possessory right of use and/or entry onto the land of another person.  This means that the holder of the easement is entitled to use a portion of someone else's land without having any ownership interest.  Many of use are familiar with utility easements, which allow utility companies to run water, gas, electric, and cable lines over or under our homesites.  Other types of easements may include the right to drive accross someone's property to reach your own if there is no road to your property (referred to as a right of way).  Importantly, an easement is a limited and specific right--e.g., a person holding a right of way to reach a landlocked tract does not have the right to hike around or hunt on the property subject to the easement (if he does so he is a trespasser).

If you are buying land that is land locked, you'll want to make sure that you have a right of way easement to get to your tract.  If you are buying land that has road access, you may be interested to know whether others will have an easement to cross your property.

Deed Restrictions (a/k/a Covenants or Limitations):  Many of us own homes that are part of a homeowners' association or otherwise subject to deed restrictions.  Deed restrictions are included in the deed from the grantor (seller) to the grantee (buyer), and impose requirements for the maintenance of the property.  For example, a deed restriction might require that the purchaser keep their lawn cut, paint their house a certain color, not park more than two cars in front of the property at any given them, etc.  The limits of what may be included in deed restrictions are essentially limited only by the imagination of the grantor and the US constitution (e.g., you cannot place a deed restriction limiting sale to only members of a certain race).

A buyer should be aware of any deed restrictions on property they are purchasing.  Often, deed restrictions help to keep up the property values of real estate and are beneficial.  The most important consideration is what you intend to use the land for.  For example, if you're planning on buying land to build your 5000 sq.ft. McMansion for your family of 5...you won't want a deed restriction limiting the home's square footage to 3000 feet.  Similarly, if you're planning on building a weekend cabin by the lake...you might not want a deed restriction requiring a minimum square footage of 3000 feet.

Liens:

A lien is an interest in property held as collateral against a loan or other debt.  A lien is not an ownership interest and is non-possessory, but may include the right to foreclose (e.g., a mortgage).  Liens may be imposed as part of financing (again a mortgage) or may be involuntarily imposed due to non-payment of taxes or special assessments, non-payment of HOA dues, etc.  In most states, a lien on real estate is only effective if it is filed with the county clerk in the county where the property is located (i.e., it attaches to the deed). 

A buyer should be careful to make sure that all liens are discharged at the time of purchase.  For example, you may buy a house that is subject to a mortgage lien in the name of the seller...but you'll want to make sure that the seller uses the funds from the sale to discharge the lien.

CAVEAT:

My father and I are both attorneys who are licensed and practicing in Texas.  My father is also licensed in California and Nebraska.  We are not offering legal advice, but are offering this information as a free service to halfvalue members.  The content of this guide is intended for informational purposes only.  If you need specific legal advice, please contact an attorney licensed in the relevant jurisdiction.

Please visit our halfvalue store at www.halfvalue.com