When it comes to buying real estate, there are many red flags to watch for. Some are things you (or a qualified inspector) can see, like structural problems, insect infestations, and mold.
Another type of red flag may be less obvious, but it could be even more critical. We’re talking about property encumbrances -- claims that non-owners have on real estate. Here’s what you need to know.
Real property vs. personal property
Property is a legal concept that grants and protects your exclusive right to own, possess, use, and dispose of something. There are two types of property: personal and real.
Personal property is moveable. It can be tangible -- for example, your car -- or intangible, like stocks and bonds.
In contrast, real property is fixed permanently to one location. Your home and the land beneath it -- and any other type of real estate -- are examples of real property. Encumbrances can affect the quality of the title and the value and use of real property.
What are real estate encumbrances?
Real estate has an encumbrance if someone besides the owner can make a claim regarding the use of the property. This can prevent you from enjoying the full rights of ownership. Not only that, but encumbrances can lessen your property’s value and restrict your ability to sell it.
There are many types of encumbrances, but four of the most common are easements, deed restrictions, encroachments, and liens.
An easement gives a non-owner the right to use your land in some way. Easements are created when someone asks you for permission to use your land. If you reach an agreement, the easement becomes official through a legal document such as a deed. The other party may compensate you for granting the easement, but any subsequent owners typically won’t receive any compensation.
There are two main types of easements:
- Easements in gross. This type of easement is attached to a person or entity rather than to the property itself. They can’t be sold, willed, or transferred, and typically terminate when the easement owner dies.
- Appurtenant easements. This type of easement "runs with the land." It stays attached to the property even if it's sold or transferred to a new owner.
Common easements include drainage ditches, public utility lines, rights-of-way, and easements by condemnation (eminent domain).
Deed restrictions are another type of encumbrance on real estate. Like appurtenant easements, they run with the land. Also called "conditions, covenants, and restrictions" (CC&Rs), deed restrictions are private agreements placed in the public record that affect the use of the land.
Many developers and homeowner associations use deed restrictions to maintain a certain amount of uniformity within the development or neighborhood. For example, a deed restriction could require properties to meet a minimum house size or prohibit owners from storing RVs and boats on the property.
An encroachment is a building or some part of it that extends beyond one owner's land and illegally intrudes on the land of an adjacent property. They're typically found during a physical inspection of the property or during a survey, often in preparation for selling a property.
Often, encroachments happen by accident, such as when your neighbor puts up a shed, fence, or retaining wall that crosses onto your property. In some cases, the encroachment is intentional. This usually happens when neighbors don't get along.
Some encroachments happen over time, such as when a hedge becomes overgrown or a tree starts to hang over a neighbor's property. Another example is when erosion changes a boundary line.
Your neighbor's encroachment might not bother you, and you don't have to do anything about it if you don't want to. However, if it does bother you, get a professional land survey and work with your neighbor to find a solution. For example, your neighbor could trim back the hedge or buy the strip of land that's under the shed they built on your property.
If you decide to sell your property before resolving the encroachment, you'll need to disclose the encroachment to potential buyers. Also, keep in mind that any encroachments can hold back a sale and ultimately reduce your property's value.
A lien is a claim on a property for the payment of a debt. The property acts as collateral, and if you don't repay the debt, the lienholder has a right to have it paid out of your property (usually through a court sale).
Common liens include:
- mortgage liens (you have one if you have a mortgage);
- tax liens, including real estate taxes;
- special assessment taxes;
- mechanics' liens; and
- judgment liens.
Liens are attached to the property (they run with the land). They don't attach to the property owner. If you want to sell your property, you have to pay off the lien to give clear title to your buyer.
Does my property have an encumbrance?
Part of your due diligence when buying real estate is doing a title search. These can find any title defects that could affect the use (or value) of the property, including liens and other encumbrances.
Keep in mind that many properties are sold "subject to all liens and encumbrances." It's in your best interest to uncover any encumbrances before making a final decision.
Finally, a general warranty deed is your best protection as a buyer. This type of deed contains a "covenant against encumbrances" warranty that guarantees there are no encumbrances against the property except those specified in the deed.
Look for those red flags
Property encumbrances can be a big deal. If your property is burdened by an encumbrance, it can limit how you use your property. It can also lower your property’s value and make it harder to sell.
Of course, a lot of this depends on the specific encumbrance. For example, assume there’s a high voltage line easement running through your property with power lines and towers. This encumbrance will have more of an adverse effect on your property’s value than, say, an underground water line that skirts the corner of your lot.
Still, it’s important to find out about any encumbrances before you buy or sell. It can save you a lot of headaches in the long run. And the best way to find those red flags is through a title search.