What is an example of an encumbrance that could affect a property?

An encumbrance refers to a claim, lien, charge, or liability attached to and binding real property. A third-party lien is a perfect example of an encumbrance because it represents a legal right or interest a third party has in the property, typically as a form of security for debt. This means that if the property owner fails to fulfill certain obligations, such as repaying a loan, the lien gives the third party the right to take action, which could include foreclosure to collect on the debt.

The presence of a third-party lien can drastically affect a property’s marketability and the seller’s ability to convey clear title to a buyer. The existence of such a lien must be resolved, usually by paying off the debt before a sale can take place, which is why it is considered a significant encumbrance.

In contrast, while high property tax rates, unpaid utility bills, and co-ownership might affect the property owner or its use and finances, they do not create a direct legal claim on the title in the same way that a lien does. Therefore, they are not classified specifically as encumbrances. Unpaid utility bills, for instance, are more of a service-related issue rather than a claim on the property itself.