IC Elesson: Good Deeds. And Bad Deeds. And Quit Claim Deeds.
Real estate education includes sexy stuff (how to find deals, how to buy them without cash) an it includes more technical stuff (should I have my LLC taxed as a partnership or a corporation).
We like learning the sexy stuff; we often don’t even think to ask about the technical stuff until it jumps up and bites us on the nose.
But one thing that a LOT of people do seem to get discombobulated over is the different types of deeds with which title is passed from one owner to the next in a real estate transaction. And since you’re paying me to recombobulate you, that’s what we’re going to discuss in this week’s Inner circle E-lesson.
As you travel around the country, there are probably 3 or 4 DOZEN different types of deeds. Sometimes they’re basically different names for the same thing (limited warranty deeds and grant deeds are extremely similar, for instance); in some cases the potential risks of accepting oe kind of deed as opposed to another are serious enough that it’s actually important to understand what the differences are.
I’m not going to attempt to break down every single kind of deed you might see, primarily because some are pretty arcane and extremely rarely used; if you happen to run across a deed with a name different than the ones I describe here, ask a local attorney about it.
First, let me say that all deeds have a few things in common: in order to be valid, there must be language in the deed indicating that the instrument is meant to convey title. It must name and be signed by a grantor (seller) who has the legal ability to sell the property. It must name a grantee (buyer) who has the legal capacity to purchase it (who isn’t underaged or non compis mentis). There must be delivery to and acceptance by the grantee; and (although this varies from state to state), there might need to be verification of the grantor’s signature in the form of a notary public’s seal, witnesses, or both.
Beyond these basics, though, what makes deeds different is that they contain different promises and warranties from the seller.
Let’s look at some of the types of deeds you’ll actually see, and what they mean.
A General Warranty Deed is probably the most commonly used deed in “lien theory” states (in other words, states in which a mortgage is a lien against a property rather than a title interest) With this type of deed, the grantor (seller) makes a whole lot of guarantees to the grantee (buyer).
For instance, the seller guarantees that he owns the real estate and has full power to convey it; that the property is free of any liens or encumbrances except those specifically recited in the deed; that no one else has any claims against the title; and that if any of this turns out not to be true, he will “defend the title”—in other words, pay to remove other liens, defects, encumbrances, or claims against the title.
So, as you might guess, this is the type of deed that most buyers want. It contains the highest level of warranty you can get (although the question of whether the seller CAN ‘defend the title’ in the case of a future issue is another thing; clearing a bad title can be pretty expensive) and it’s also the most common type of deed issued when a regular seller sells to regular buyer.
A Limited Warranty Deed (also called a Special Warranty Deed) gives the buyer these same guarantees, but only for the period of time of the grantor’s ownership.
In other words, the seller only warrants that the title has no problems or encumbrances that arose while he owned the property, and no guarantees for the any period of time prior to that. So the grantor of this kind of deed is only required to defend the title against claims that might arise from the period of time during which he owned the property.
Limited Warranty deeds are very common, primarily because most banks selling properties from their REO departments insist on giving a Limited Warranty, rather than General Warranty, deed.
A Fiduciary Deed (including Guardian’s Deed, Guardianship Deed, Administrator’s Deed, Trustee’s Deed, Executor’s Deed, Tax Deed, and Sheriff’s Deed) is always given by someone who is acting on behalf someone else, and it usually gives no warranties as to the state of the title.
Since a fiduciary is someone who is appointed—by a court, a will, a trust, etc.—to convey title on behalf of the seller, the deed contains language that states that the act of selling the property falls within the duties of the fiduciary, and, in the case where the fiduciary has been appointed by a court of law (as when the fiduciary is a guardian, executor, or sheriff), that he has been appointed by a court of competent jurisdiction.
However, since the deed is being transferred by someone other than the owner of record, these deeds state that the transferor is NOT making any warranty about title.
A Quick-Claim Deed isn’t a thing. It’s an understandable mis-hearing of Quit Claim Deed, which is a type of deed that makes no warranties at all about the title that’s being conveyed.
You’ll see these a lot in the real estate investing world, because they’re used in situations where the seller isn’t aware of, and doesn’t care to pay to investigate, any liens or other ownership interests in the property. It conveys whatever rights and interest the grantor has without stating the nature of that interest, or whether it exists at all. In other words, if a quit claim deed could talk, it would say, “Stop calling me quick-claim!!” and then it would say, “The grantor may or may not have any interest in this property, and there may or may not be liens, debts, other owners, title problems, all that stuff, but whatever interest the grantor DOES have, he’s giving to you.”
You might ask yourself why anyone would accept a quit claim deed on a property. There are bunch of answers to that, including:
- If you’ve done a title search on the property and especially if you’ve been able to get a title insurance policy, you KNOW what interest is being conveyed to you and, with the insurance, you’re protected against any unknown claims. Note that is some states, it’s not actually possible to GET title insurance on quit claim deeds, so if that’s important to you, you might want to find out
- Some seller, particularly hedgefunds, will not issue any other kind of deed. So if you want the property, you’ll just take step 1 above and take the deed they offer.
- In many (but certainly not all) cases, there’s no evil intent behind, or negative consequences to, a quit claim deed. In fact, they’re often used to RESOLVE title problems or to “merge” interests. For instance, if an owner dies and 7 kids inherit the property, 6 of them might quit claim their interests to the 7th because they want him to have the house, or because they aren’t interested in showing up to a closing to sell the property to you. A husband might quit claim a deed to a wife in a divorce. You might quit claim a deed to your own LLC.
In some states, Quit-Claim Deeds are not legal forms of title transfer, and in others, they have alternative names. In Massachusetts, for instance, they are called Release Deeds.
Two quick notes about deeds that you HAVE to understand if you’re going to buy and sell houses:
- A property can be purchased using one kind of deed, and sold using another. For instance, a bank buying a property at a foreclosure auction will receive a Sheriff’s Deed, but will re-convey using a Limited Warranty Deed. You might buy the property from the bank with a Limited Warranty Deed but later sell with a General Warranty Deed.
- A professional title search and title insurance almost obviates the need for a lot of warranties from the seller, and you should always get, and, if you’re a wholesaler, encourage your BUYERS to get, these 2 things. Title insurance has saved me over $50,000 is legal fees in the last 30 years, and I haven’t paid nearly that much in premiums.
These two things go much further toward protecting your title interest than any wording on any deed ever will!
As a wholesaler, if we are holding the property for such a short time, why should we purchase insurance?
YOU shouldn’t. Your buyer should, though.