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Encumbrance

DEFINITION

Anything that affects a property owner’s use of property or title.

EXPLANATION

Property owners may have their right to real property partially or fully encumbered by claims from private parties or the government. An encumbered property has a lien on the title of the property that prevents the owner from having full interest in the property. This is called an encumbrance to real property. If a property is encumbered, the property owner’s interest can be affected by limiting the owner’s property use and their ability to sell property. Because an encumbrance to property can negatively affect its transferability in the course of a sale, an encumbrance can drastically affect the marketability of a property.

Encumbrance claims made by the government can occur because of the owner’s failure to pay property taxes or because of the government’s need for a portion of the landowner’s property for a public use. If the government claims an encumbrance on a portion of the land, it is done so on the basis of benefiting the neighborhood. In many instances, the encumbrance of land by the government may not be for an immediate use but rather for future city plans.

Government Encumbrance of Property

The principal reasons the government might encumber land, thereby claiming an interest in the landowner’s property, are to use the property for public purposes or to maintain uniformity in a certain city, neighborhood, or town. The government can require specific zoning ordinances or different government controls to regulate properties for the public good.

How the Value of Property is Affected by Encumbrances

Encumbrances can affect the value of a property. For example, a savvy buyer may request for the seller to reduce the listing price because of a clouded title, which can affect the buyer’s interest in the property. Even if the property is improperly encumbered, the land rights of the owner is diminished, which reduces the marketability and value of the property. Encumbrances against the property, particularly by the government, will not affect the value of the property as much as private claims. This is because claims by the government might only affect the size of the property the buyer is getting, whereas a private claim would prevent the full ownership interest of the land owner.

A clouded title can make it more difficult for a seller to sell his or her home because other non-owning parties may be owed money, which would impede a buyer’s ability to buy a home free of potential problems. A cloud on title, or clouded title, as it also commonly referred to as, will make buyers hesitant to buy the property before other parties remove their claim to title or compensation.

Clouded title means the full interest of the property owner is less than perfect due to an encumbrance by a creditor, personal debt, lien, or public claim. This means a cloud on title of real property is the presence of a claim by a non-owning property owner. Marketable title, on the other hand, is when title is clear, thereby allowing buyers to purchase properties without the risk of other non-owning claimants having a potential stake in the property. A quick claim deed may be one method in which the clouded title can be cleared.

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