You’ve found the perfect home and are ready and willing to make an offer to make it yours. There is only one problem: there is a ban on it.
What exactly does that mean? As the name suggests, an encumbrance is something that hinders, hinders, or encumbrances—something that interferes with the function or activity of something (such as property) or some transaction (such as the sale of real estate). It sounds disgusting, and it can be.
But not all controversies are created equal. Some are mundane things like a mortgage. Others may be unusual, indicating legal or financial claims on a property that, if not completely hindering the sale, are difficult to sell and less appealing to own.
That’s why it’s important for house hunters to understand what real estate foreclosures are, the different types of foreclosures, and how they can affect your property purchase.
What is a foreclosure in real estate?
There are many types of foreclosures, but in real estate they all mean the same thing. “It’s a claim that someone owns someone else’s property,” said Benjamin Dixon of the McKay Dixon group in New York at Douglas Elliman. “Charges may arise due to unpaid taxes, debts owed to mechanics or other vendors, or previous homeowner’s mortgages.”
If a property has a restriction, there is a restriction on how the owner of that property can use it. Some restrictions are enforced by state or municipal zoning laws or environmental regulations. These often restrict certain types of construction on the property or activities within it (such as if you rent it out or run a business).
Other barriers stem from financial difficulties, such as defaulting on debt. These can pose various challenges, affecting the transfer of assets. As a result, they make it more difficult to sell and less attractive to buy, because they often shift the buyer’s responsibility. “They often transfer with the property, so it’s important to make sure they’re cleared before taking ownership,” Dixon explains. “No one wants to buy someone else’s problem.”
An example of obstruction
Let’s say a homeowner can’t make a lot of payments to the lender—the general contractor who did the work on the house. A lender can place a lien on the homeowner’s property, which is a claim on the property until the homeowner pays the debt. This is a financial problem that can make it difficult to sell the house.
Different types of barriers
There are different types of foreclosures that can affect a home. You can get at least one enclosure with any property. Not all restraints are deal-breakers, but all are limiting or restricting in some way.
Financial Disputes: Liens
“A mortgage is a form of financial claim against real estate,” explains Joe Demarkey, head of strategic business development for Reverse Mortgage Fund, a Bloomfield, New Jersey-based firm. “The purpose is to secure a debt or obligation incurred by the owner of the property and thereby affects the ownership of the property.”
A lien on property means that if the financial obligation is not met within a certain period of time, the lender can take the property and sell it to repay the borrowed money. It may also mean that the lender’s debt must be satisfied before the property can be sold.
Technically, a mortgage lien represents a lender’s claim on property if you default on your debt. Usually, this is not a big deal, because the home seller usually pays the mortgage lender with the buyer’s money. But with other property liens, title to the property is unclear, preventing the seller from completing a sale — or forcing the buyer to foreclose on the lien.
Legal restriction: Zoning
Statutory restrictions are restrictions set by governments. Zoning laws are a common example of a legal dispute and may be the reason you live with other families instead of doing business. Legal restrictions may restrict you from building certain structures on your property, such as additional housing, without obtaining a permit. Failure to comply with local regulations may limit the types of water, septic or power systems your property can use.
“Easement refers to the right of one person to use real estate owned by another party,” Demarkey said. It is generally a specific or limited use or purpose.
There are two types of mitigation.
- A general condition, which allows your property to be used for a specific purpose but does not affect ownership. These often include utilities. A gas company can lay pipelines or an electric company can install power lines on your property, for example.
- Apprentice easements come into play when there are two properties that share common space. “A common example is building a driveway that runs through a neighbor’s property,” says DeMarque. Or, a path through the backyard to a public park, or steps down to the beach.
Encroachment, as the name suggests, is when someone who does not own property interferes. Violations often lead to legal disputes. “For example, if the corner of the house is on a surveyed boundary line, the owner who trespassed on the property can sue for damages or force the other owner to remove the trespass,” says Demarkey. If not resolved, these issues can create transfer of ownership issues.
A restrictive covenant is essentially a restriction that includes an agreement to follow the rules of a society. Homeowners associations often set rules that all homes in a neighborhood must follow. These can be placed on new constructions to ensure that every house in the new construction follows certain standards.
A lease is an agreement between a property owner and a tenant, whereby the latter is allowed to use the property for an agreed period of time. A lease can at least guarantee the tenant that the property will not be adversely affected by the sale of the property. The lessee has the right to continue using the property according to the lease agreement.
Why should I know if a property is foreclosed?
It is important to understand the potential controversies before offering a property so that you are fully aware of how it may be used by you or others. or whether lawfully offered for sale.
How to find out
You can find out the restrictions on the property by conducting a title search. If you are still unsure about a property after conducting a title search, consider contacting a real estate attorney who can provide legal advice and guidance on how to handle the matter.
You can also purchase title insurance to protect against certain types of objections that may arise during the purchase process.
Should I still buy a sealed property?
Just about every property has a certain type of restriction. The key is to know what type of foreclosure it is and what impact it will have on your purchase and the life of your home.
You may not have to worry about legal disputes like zoning regulations. But if there’s an IRS lien or property tax lien on the home, you could be in trouble. In particular, these kinds of financial hurdles can create challenges for home sellers and home buyers alike, meaning additional costs at best or at worst hindering closing. You want to avoid anything that obscures the topic or shifts someone else’s burdensome obligations onto you.
Congestion can be frustrating, time-consuming, and sometimes expensive to deal with. But you don’t have to walk away from a foreclosed property just because of the possession. Make sure you understand exactly what the order means – and how it applies to you.