What do you know about the difference between an encumbrance and a lien?

On Behalf of | Jul 31, 2021 | Real Estate & Development

As someone involved in Arizona’s construction industry, you likely encounter obstacles and setbacks that derail your projects. Do you know what differentiates those complications?

Chron defines encumbrances and liens and explores their differences and considerations. If either hampers your projects, understanding how they work may help you develop a solution.

Encumbrance

Any charge or claim against real estate property represents an encumbrance, which also applies to other forms of personal property. The party setting the claim in motion gains a legal right to the real estate property. Until the property owner clears the debt or works with the other party to handle the problem, the encumbrance remains in place. Much like liens, an encumbrance may make it difficult to transfer ownership of or sell the property.

Lien

Creditors may confiscate real estate if owners cannot make payments or clear unpaid debts. The IRS, a medical care facility, a credit card company or another creditor may sue an individual or entity and win, which establishes the lien. With an active lien, creditors have a legal hold on the debtor’s home and possession of her or his bank account.

Differences and considerations

While all liens classify as encumbrances, not all encumbrances classify as liens. Instead, encumbrances encompass claims on another’s property, such as mechanic liens, vehicle liens and court judgments.

Those with liens or encumbrances on their real estate properties must let potential buyers know about the existing claims or charges. Buyers unaware of encumbrances and liens on a property inherit them when they become the property’s new owners. They may take legal action against the entity or individual who did not inform them of the claim.

Educating yourself on real estate and construction law may save you time and effort. Further, proper knowledge may save your projects and the hard work you put into them.