Title Encumbrances and How to Solve Them

In the world of real estate, your client’s journey from finding a dream property to finally owning it can be both exciting and challenging. 

One crucial aspect of any real estate transaction is the title, which represents a package of ownership rights to the property. Title encumbrances can cause significant delays in the closing process and even the cancellation of a sale. This leads to headaches for both buyers and sellers, but an experienced real estate team and title company can handle almost any issue that arises. 

Let’s explore the basics of title encumbrances, their potential impact on a property deal, and most importantly, how to navigate and resolve them to ensure a seamless transaction.

Encumbrances, Easements, and Clouds

Title encumbrances are essentially any claims, liens, or restrictions on a property that create a cloud on title and can affect its transfer of ownership. 

These encumbrances can arise due to various reasons, such as outstanding mortgages, unpaid taxes, easements, delinquent contractor bills, zoning restrictions, or legal judgments against the property or the previous owner. 

It’s crucial for buyers to be aware of any encumbrances or clouds before proceeding with a purchase. These defects can influence the value of the property, as well as the ability to sell or refinance. For example, if there is a lien, the new owner may have to pay it off before receiving any profit from the sale.

Understanding each kind and its implications is crucial for any potential home buyer or investor. The most common title encumbrances are primary and secondary mortgages, which are also referred to as junior liens. While the main mortgage is typically paid off when the property is sold, a junior lien may slip through the cracks.

Here are some other types of title encumbrances to be aware of:

Liens: This is a legal claim against a property that is used to resolve a debt such as federal or state taxes, remodeling projects, or other creditors. 

Easements: An easement gives an individual or entity the right to use a property for a specific purpose. Utility companies may require an easement to maintain power or phone lines, or there might be an easement in place with a neighbor for access to an adjoining property.

Covenants, conditions, and restrictions (CC&Rs): These are limitations or rules imposed by a homeowners association or a previous owner that govern how the property can be used or altered. CC&Rs can include a variety of stipulations, so it’s important that buyers are aware of them before closing.

Incorrect documentation: Not all public records are correct, and sometimes small clerical errors can cause huge problems for hopeful homeowners. Mistakes or discrepancies in the parcel number, property description, or physical deeds may result in conflicts and legal action.

Addressing and Resolving Encumbrances

When buying or selling real estate, it’s vital that a clear chain of title is established. This is a historic record of ownership from the original builder to the present owner

Title companies perform a comprehensive search of public records and other documents to determine if there are any outstanding mortgages, liens, or other encumbrances. It’s also smart for buyers to acquire title insurance to protect their investment if a previously undisclosed encumbrance emerges after the purchase.

If any issues are discovered, the next step is to determine how it will impact the transaction. If a lien or judgment is found, potential buyers can work with an attorney to negotiate with the lienholder or creditor to pay off the debt and obtain a release of the encumbrance. 

It may be necessary to renegotiate the purchase agreement to include a clause that the seller has to resolve any existing encumbrances before the transaction is completed. A new land survey may be required to clarify questions about easements or property boundaries

Sometimes, the only solution is to partner with a knowledgeable real estate attorney and bring an action to quiet title. This legal proceeding will establish clear ownership of a property, settle all disputes, and remove any clouds. 

Get the Right Answers

Title encumbrances can turn into complex issues and pose significant challenges in both commercial and residential property transactions. But by working with a team of highly skilled real estate professionals, you can identify and help resolve these encumbrances and ensure it’s smooth sailing for you and your clients. 

Landtrust provides a spectrum of services for brokers, investors, and attorneys in Chicagoland, Wisconsin, and Florida. Reach out today to learn more about what we can do for you!

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