Definition of Incumbrance
An incumbrance, also referred to as an encumbrance, is a broad term used in real estate that covers any claim, lien, charge, or liability attached to and binding on real property. These can be financial claims like mortgages or non-financial interests such as easements, and they can directly impact the property’s value, use, or transferability.
Examples of Incumbrances
- Mortgages: A mortgage is a common type of financial incumbrance, pledging the property as collateral to secure a loan. The property cannot be sold without fulfilling the mortgage obligations or getting lender approval.
- Easements: This non-financial incumbrance grants a third party the right to use a portion of the property for a specific purpose, like a pathway or utility line.
- Property Tax Liens: If property taxes are not paid, the government can place a lien on the property. It’s a legal claim that must be settled before the property can be sold or refinanced.
- Restrictive Covenants: These impose limits on property use, such as prohibiting certain buildings or activities, effectively binding the current and subsequent owners.
Frequently Asked Questions
What is the difference between an incumbrance and a lien?
A lien is a type of incumbrance. While an incumbrance can be financial or non-financial, a lien specifically refers to a legal claim on the property for unpaid debts.
Can an incumbrance affect property value?
Yes, certain incumbrances like restrictive covenants or easements can affect a property’s value by limiting its use or making it less attractive to potential buyers.
How can I find out if a property has an incumbrance?
A title search through a title company or legal professional can reveal all recorded incumbrances on a property.
Can incumbrances be removed?
Some incumbrances, like a paid-off mortgage, can be removed through the proper legal channels. Others, like certain easements, may be permanent.
Do incumbrances affect my ability to sell a property?
Yes, certain incumbrances such as unpaid liens must be settled before a property can be sold. Other incumbrances can limit the pool of interested buyers.
Related Terms
- Lien: A legal claim or right against a property as collateral for a debt that the property owner needs to pay off.
- Easement: A legal right to use another person’s land for a specific limited purpose.
- Restrictive Covenant: Limitations imposed on the use of land that bind the land either from a previous owner agreement or by a developer.
- Title Search: An examination of public records to ensure that the seller is the legal owner of the property and thus eligible to sell it.
Online Resources
References
- Flores, J. A. (2018). Real Estate Principles: A Value Approach. McGraw-Hill Education.
- Miller, R. & Hollowell, S. (2016). Modern Real Estate Practice. Dearborn Real Estate Education.
Suggested Books for Further Studies
- Jacoby, W. (2015). Your Successful Real Estate Career. AMACOM.
- Richmond, D. (2017). The Real Estate Investor’s Handbook. Wiley.
- Floyd, C. F., & Allen, M. (2011). Real Estate Principles. Kaplan Publishing.
Real Estate Basics: Incumbrance Fundamentals Quiz
### What is an incumbrance?
- [ ] A type of insurance policy for real estate.
- [ ] An insignificant regulation.
- [x] A claim, lien, charge, or liability attached to real property.
- [ ] A type of zoning law.
> **Explanation:** An incumbrance is any claim, lien, charge, or liability attached and binding on real property, affecting its value or transferability.
### Which of the following is NOT an example of a financial incumbrance?
- [ ] Mortgage
- [ ] Property tax lien
- [x] Easement
- [ ] Mechanics lien
> **Explanation:** Easements are non-financial incumbrances; they grant the right to use the property, unlike mortgages, property tax liens, and mechanics liens, which are financial claims.
### Can a restrictive covenant be considered an incumbrance?
- [x] Yes
- [ ] No
> **Explanation:** A restrictive covenant is a type of incumbrance that imposes limitations on property use, affecting its use and potentially its value.
### Which of these documents would you use to find existing incumbrances on a property?
- [ ] Building permit
- [x] Title search report
- [ ] Property inspection report
- [ ] Sales contract
> **Explanation:** A title search report collates all information regarding legal claims, liens, easements, and other incumbrances attached to a property.
### Who places a property tax lien on a property?
- [ ] Previous property owner
- [ ] Title company
- [x] Government
- [ ] Real estate agent
> **Explanation:** The government places a property tax lien for unpaid property taxes, which affects the owner's ability to transfer or refinance the property.
### What happens to a property when the mortgage is fully paid off?
- [ ] The property automatically becomes tax-exempt.
- [x] The mortgage lien is removed.
- [ ] Interest rates adjust.
- [ ] The property value decreases.
> **Explanation:** When a mortgage is fully paid off, the lien associated with it is removed through the proper legal channels.
### Which entity typically performs a title search?
- [ ] Local government
- [ ] Real estate agent
- [x] Title company
- [ ] Accountant
> **Explanation:** A title company typically performs a title search to ensure that the seller is the legal owner of the property.
### Why is it essential to identify any incumbrances before purchasing a property?
- [ ] To avoid surprise taxes.
- [x] To understand any limitations or liabilities that come with the property.
- [ ] To improve landscaping.
- [ ] To schedule utility providers.
> **Explanation:** Identifying incumbrances before purchasing is crucial to understand any existing limitations or liabilities on the property, potentially affecting its use and value.
### Can incumbrances restrict property use?
- [x] Yes, certain incumbrances like restrictive covenants can impose limits on property use.
- [ ] No, incumbrances do not affect how a property can be used.
> **Explanation:** Certain incumbrances, such as restrictive covenants, can indeed restrict how a property can be used.
### What is a mechanics lien?
- [x] A lien placed by contractors or suppliers for unpaid work or materials on a property.
- [ ] A tax obligation.
- [ ] An easement for utilities.
- [ ] A real estate sales contract.
> **Explanation:** A mechanics lien is placed by contractors, suppliers, or laborers for unpaid work or materials supplied in building or improving a property.
