Encumbrance
Candlefocus EditorA common encumbrance is a lien, which is an enforceable claim a creditor has against the property to ensure payment of a debt. These can include tax liens, mortgage liens, mechanic's liens, judgment liens, and other financial encumbrances. A lien gives the creditor the right to foreclose on the property to collect their debt, which can be a major factor in reducing the value of a property.
Other types of encumbrances may include easements which grant rights to utility companies or other individuals to use a certain portion of the property. Homeowners may also grant an easement to a neighbor allowing them to traverse across the property to get to their own. This can be a major detriment to the value of the property, as the homeowner is unable to gain access to the entire lot and a buyer may be scared away from the thought of someone else having shared access.
Yet another encumbrance could be a lease agreement. If a tenant has a lease, the value of the property will be affected, as the income from the lease will be factored into the value of the purchase. Depending on the length of the lease, other potential buyers may be scared away until its expiration.
In some cases, encumbrances may not have large impacts on the value of a property or may even help to increase its worth. For example, mortgages are an encumbrance, but they can also serve as an incentive for a buyer to purchase an already mortgaged property.
In short, an encumbrance is any claim or legal obligation made against a property. Understanding the different types of encumbrance, their impact on value, and any steps that may be taken to deal with them is essential when considering any real estate transaction.