Definition: Unencumbered is a property that has no legal claim attached and therefore can be freely transferred to a third party. An asset that is unencumbered has an important advantage over an encumbered one, due to the fact that there is nothing that could prevent the owner to use it or dispose it as he wishes.
What Does Unencumbered Mean?
In real estate, properties with no encumbrance attached, such as a mortgage, an easement or any other, are easier to transfer than those that have any of these elements. The value of such properties is often higher than their encumbered counterparts as there are no strings attached or obstacles if a purchase is intended.
On the other hand, if an immediate sale is required, the owner of an unencumbered asset has the sole right to put a price that suits his needs. This is not the case for mortgaged assets, for example, where lenders might establish minimum pricing requirements in order to approve a sale.
From a business standpoint, employing loans to acquire new assets is a common practice within companies, but acquiring assets through financing, in instances where the asset is also the collateral for the loan, will limit the available options for a company that is struggling with cash flow and needs to dispose the asset as soon as possible.
Example
Margaret is a recently graduated student that is currently working for a big pharmaceutical firm. Recently, an opportunity presented to her to acquire a small two-bedroom apartment in the city and she took it by using some of her savings and a loan that her bank approved for the purchase. After a few years, the property increased its value tremendously and Margaret wanted to take advantage of it.
Nevertheless, the property was encumbered, which made it difficult for her to transfer it. She decided to ask her mom for the remaining balance of the mortgage, to free the property from it and, after paying the bank, he had an unencumbered property that she was able to sell easily.
