What are Encumbrances in Real Estate?

  • November 7, 2019

When investing in real estate property, it is crucial to be aware of all current and future issues that it may present. Sometimes this can mean claims that any non-owners have on the property, known as encumbrances in the real estate world. To help you make the most beneficial investment, review the different types of encumbrances you may find in real estate below.

Encumbrances in Real Estate

Why do Encumbrances Matter?

Before getting into the types of encumbrances you may encounter, you need to know what encumbrances are in general. When purchasing real estate property, there is something called an abstract of title you will want to receive. In real estate, an abstract of title is a written record of any documents related to the property. This abstract is important because you should be aware of any potential claims on your property when buying it. Typically, an abstract of title contains documentation found at the courthouse, which includes encumbrances. An encumbrance will detail potential claims, limitations, or liability against a real estate property. In other words, an encumbrance can prevent you as a property owner from having full control over your new property. While some encumbrances may not impact a property’s market value, such as zoning laws, for example, it is still essential to understand them when investing.

Types of Encumbrances in Real Estate

1. Liens

In general, a lien is a claim made against a property to secure unpaid debt. While there are a variety of types of liens, there are two main categories of liens in real estate. One category of real estate liens is voluntary liens, and the other is involuntary liens. Voluntary Liens An example of a voluntary lien is one of the most common: a house’s mortgage. A mortgage is a loan that is taken out and used to make a large real estate purchase. Thus, as with any other loan, the borrower has an expected number of payments to repay the loan plus interest. So, when purchasing real estate property, you want to know about the property’s mortgage, as the lender will hold legal ownership until the mortgage is paid off. As there are a variety of commercial real estate loans one can secure get, the lender may vary. However, the overall payment structure of a mortgage remains the same. Involuntary Liens On the other hand, with involuntary liens, there is a difference to take note of compared to voluntary liens. This significant difference is that, unlike a mortgage, the previous homeowner does not create this lien. An example of an involuntary lien is a construction lien. Consider, for example, the previous homeowner hired someone to renovate their front sidewalk. This contractor may then hire sub-contractors for assistance on the renovation. If the contractor the homeowner hired doesn’t pay a subcontractor or supplier, that becomes an issue for the homeowner. While a subcontractor cannot make a legal claim against the homeowner, as there was no contract between them, they can make what is called a mechanic’s lien on the property.

2. Easements

Easements are a common type of encumbrance you may encounter in real estate. In general, an easement is a right for another entity to use land that is owned by another person. The main reason for an easement is due to utility lines, such as electricity or water, placed around a property You will want to know about any easements that may apply to the real estate you’re buying. If there is one, such as the example of utilities above, then that may be an essential factor that impacts your investing decision.

3. Deed Restrictions

When purchasing real estate, you will typically receive the deed to your new property, as deeds pass from owner to owner. However, if a previous owner sells their property and places a restriction in the deed, this counts as an encumbrance. Primarily, a deed restriction is placed by a seller to restrict the use of specific parcels, or areas, of a property. For example, a section of property could have a restriction from a previous homeowner to limit its uses. Another deed restriction to keep in mind applies to larger pieces of real estate. To elaborate, parts of an estate can be sold from pieces of real estate property. Thus, this would go into the property’s deed and would make future owners claim to that land tricky. All in all, it is crucial to fully understand what a deed to real estate property entails when investing. This way, you can catch any deed restrictions that could prevent you from acting on any plans you have for the property.

Invest Wisely in Commercial Real Estate

When it comes down to it, investing in real estate can seem like an intimidating task to take on. However, with the right preparation beforehand, investing can be made much more straightforward. For example, if you’re interested in investing in commercial real estate, there are a plethora of real estate investing blogs for you to read. Keeping up with the real estate market is essential, after all. Many of these blogs also offer a variety of insider perspectives to consider. Overall, real estate investing blogs can give you a taste of the market without you having to take part in investing just yet. If you do feel you’re ready to invest, one option that many consider is partnering with an investment company such as AVANA Capital. By working with a team of experts at AVANA Capital, you can easily take out a loan for larger real estate purchases, for example. By and large, partnering with a company like AVANA Capital means any real estate investment will be in good hands. If you have any questions or want more information on how the expert team at AVANA Capital can help you with real estate investments, contact them today!