Encumbrance

An encumbrance is any legal right or interest in a property held by a party other than the property owner that may affect the property's use, value, or transferability. Encumbrances include liens (such as mortgages, tax liens, and judgment liens), easements (rights of way for utilities or neighbors), deed restrictions, and other claims against the property.

Understanding encumbrances is fundamental to tax lien and tax deed investing. When conducting due diligence, investors must identify all encumbrances on a property to accurately assess its value and the potential complications of their investment. Some encumbrances, like utility easements, are relatively benign and don't significantly affect property value. Others, like environmental liens or extensive mechanic's liens, can dramatically impact the investment's viability.

One of the advantages of tax lien investing is that many encumbrances are subordinate to (junior to) property tax liens. When a property goes through tax sale foreclosure, most junior encumbrances are extinguished. However, certain encumbrances may survive a tax sale, including federal tax liens (which have a 120-day redemption period), certain government liens, and some easements that run with the land.

Performing a thorough title search is the primary method for identifying encumbrances. This search examines public records including deed records, lien filings, court judgments, and recorded easements. Many investors hire professional title companies to conduct these searches, especially for higher-value investments where the cost of an unexpected encumbrance could be significant.