A Property With Encumbrances That Will Outlast The Closing

A Property with Encumbrances That Will Outlast the Closing: Navigating the Risks

Buying a property is a significant financial commitment, and due diligence is paramount. One often overlooked aspect is the presence of encumbrances that may survive the closing process. These encumbrances, essentially claims or liens against the property, can significantly impact your ownership and enjoyment, potentially leading to costly legal battles and financial headaches. This comprehensive guide explores the various types of encumbrances that may outlast the closing, helping you navigate the risks and make informed decisions.

Understanding Encumbrances: Beyond the Mortgage

An encumbrance is any claim or right against a property that limits its use or transfer. While a mortgage is the most common encumbrance, many others can exist and persist even after you've signed the closing documents. Ignoring these can lead to considerable problems down the line. Let's delve into the different types:

1. Liens: A Cloud on Your Title

Liens are claims against a property to secure payment of a debt. Several types of liens can outlast the closing:

• Mechanic's Liens: These are filed by contractors, subcontractors, material suppliers, or laborers who haven't been paid for work performed on the property. Even if the previous owner owes the debt, the lien can attach to the property itself, and you could become responsible for satisfying it. Thorough title searches and reviewing contracts are crucial to uncovering potential mechanic's liens.

• Tax Liens: Unpaid property taxes create a tax lien, which is a government claim on the property. These liens are powerful and can lead to forced sale if not resolved. Always verify that property taxes are current before closing.

• Judgment Liens: These result from unpaid court judgments against the previous owner. The creditor can place a lien on the property to recover the debt. A comprehensive title search should identify existing judgment liens.

• HOA Liens: If the property is part of a homeowners association (HOA), unpaid HOA fees can result in a lien being placed on the property. These can accumulate quickly, and the new owner becomes responsible for paying them. Review the HOA documents and confirm that all fees are current.

2. Easements: Rights of Way and Other Uses

Easements grant a right to use someone else's property for a specific purpose. These rights can be appurtenant (attached to a neighboring property) or in gross (belonging to a specific individual or entity). Easements often survive the closing, potentially affecting your use and enjoyment of the property:

• Access Easements: These grant someone the right to cross your property to access their own. This is common in landlocked properties.

• Utility Easements: These allow utility companies to access your property to maintain lines and equipment.

• Drainage Easements: These provide for the drainage of water across your property.

3. Encroachments: Structures Extending Beyond Property Lines

Encroachments occur when a structure (like a fence, shed, or even a portion of a house) extends beyond the property line onto neighboring land. These are often discovered after closing and can lead to disputes with neighbors. A survey is essential to identify any existing encroachments.

4. Restrictive Covenants: Rules and Regulations

Restrictive covenants are legally binding agreements that limit how the property can be used. These are often found in deeds and can place restrictions on things like building size, architectural style, or the types of activities permitted on the property. Carefully review the deed and any related documents to understand any existing covenants.

Due Diligence: Protecting Yourself from Unforeseen Encumbrances

Identifying and mitigating the risks associated with encumbrances requires a proactive approach during the buying process. Here's a step-by-step guide to effective due diligence:

1. The Title Search: Unveiling Hidden Claims

A title search is crucial. This involves examining public records to uncover any claims against the property. A thorough title search performed by a qualified professional is vital. Don't rely solely on the seller's disclosure.

2. Reviewing the Title Commitment: Understanding Your Exposure

The title commitment is a document issued by the title insurance company. It outlines the condition of the title and identifies any potential encumbrances. Review this carefully before closing.

3. Obtaining a Survey: Defining Boundaries and Identifying Encroachments

A property survey is essential for identifying any encroachments or boundary disputes. This helps prevent future conflicts with neighbors.

4. HOA Review: Understanding Rules and Financial Obligations

If the property is part of an HOA, carefully review the governing documents, including the covenants, conditions, and restrictions (CC&Rs), and confirm that all fees are current.

5. Examining Public Records: Uncovering Potential Liens

Independently research public records to verify the accuracy of the information provided in the title search and seller's disclosure. This might uncover issues not highlighted elsewhere.

6. Professional Guidance: Seeking Expert Advice

Consult with a real estate attorney to review all documents and ensure you understand the implications of any encumbrances. An attorney can also advise you on how to negotiate the resolution of any outstanding issues.

Negotiating and Resolving Encumbrances

If you discover encumbrances during the due diligence process, several options exist:

• Negotiation: Try to negotiate with the seller to address the encumbrance before closing. This could involve reducing the purchase price to account for the cost of resolving the issue or having the seller resolve the issue before the sale.

• Title Insurance: Consider purchasing title insurance to protect yourself against unforeseen title defects or encumbrances that might surface after closing. While it won't cover all issues, it can provide financial protection for certain covered claims.

• Legal Action: In some cases, legal action might be necessary to resolve an encumbrance. This is a last resort and can be costly and time-consuming.

Conclusion: A Prudent Approach to Property Purchase

Buying a property with encumbrances that survive the closing is a significant risk. Thorough due diligence, professional guidance, and a cautious approach are critical to protecting yourself from potential financial and legal liabilities. By understanding the various types of encumbrances and taking the necessary steps to uncover and address them, you can significantly reduce your risk and ensure a smooth and successful property acquisition. Remember, proactive due diligence is your best defense against unforeseen complications, saving you time, money, and potential legal battles down the line. Don't rush the process. A careful and informed approach is essential to a successful and worry-free property purchase.