Key Takeaways:
- A warranty deed is a legal document that is used when property is sold and ownership is transferred from the seller to the buyer.
- With a warranty deed, the seller guarantees that the property is free of property issues and that they have the legal right to sell to the buyer.
- The deed includes a property description and discloses all known encumbrances such as judgments, liens, or easements.
It is important for real estate investors to understand warranty deeds to be fully aware of their legal protections and guarantees when buying property. Such knowledge will not only shield them from future disputes but also enhances their ability to negotiate better deals. This article covers how warranty deeds help investors lower risks and safeguard their investments.
What Is a Warranty Deed?
A warranty deed is a legal document that is used when property is sold and ownership is transferred from the seller to the buyer. The document typically includes a property description and the names of individuals involved and discloses all known encumbrances such as judgments, liens, or easements.
Purpose of a Warranty Deed
With a warranty deed, the seller guarantees that the property is free of property issues and that they have the legal right to sell to the buyer. Specifically, it pledges that:
- The grantor is the property’s rightful owner and has the legal right to transfer the title.
- The title would hold up to third-party claims to property ownership.
- The property is free and clear of all outstanding claims and liens.
- The owner will do anything to ensure the buyer’s title to the property.
If title issues crop up after signing a warranty deed, the buyer can sue the seller. Why? Because they are legally responsible for any breach of guarantee.
How Warranty Deeds Work
There are a number of steps to the warranty deed process to make certain that ownership transfer is legal and properly documented:
- Create the deed. When crafting a deed, it is helpful to seek legal advice to be sure all content is accurate and uses the proper language.
- Execute. The deed must be signed by the seller; depending on the state, the buyer may not have to sign. It must also be notarized.
- Record the document. The deed must be recorded with the county in which the property is located. Doing so gives notice that ownership has been transferred and the property is no longer owned by the seller.
Common Types of Deeds
There are a number of different types of warranty deeds, including:
- General warranty deed. The gold standard of property transfers, this type of deed offers the maximum potential protection from future claims against the title. The deed is nearly always used in residential purchases.
- Special warranty deed. This deed guarantees that, during the seller’s ownership, there has been no encumbrance of the property. It covers nothing that occurred before then.
- Quitclaim. This deed creates no guarantees or warranties, nor does it constitute proof that the seller ever possessed a valid claim to the property. It merely says, “Whatever I had is now yours,” even if that turns out to be nothing.
When Are Warranty Deeds Used?
Warranty deeds are used when it is necessary to affirm that the property title has no defects or encumbrances.
Special warranty deeds are often used by temporary owners such as banks that have acquired real estate through foreclosure commonly use such deeds. They are commonly used when the government is involved. This could mean a tax deed, sheriff’s deed, or a deed in lieu of foreclosure.
Meanwhile, quitclaim deeds are often used in cases of inheritance, divorce, or transfer of ownership to a trust or business. They make no warranties about the title and turn over any interest the grantor has in the property.
Warranty Deeds vs. Title Insurance
Warranty deeds and title insurance are similar in that they both involve property ownership, but they serve different purposes. While a warranty deed guarantees that no claims exist to a property, a title insurance policy provides protection from financial loss associated with issues of ownership. All such risks are shifted to the insurance company.
Is a Warranty Deed the Same as a Mortgage?
While each plays a distinct role in real estate transactions, there is a common misconception that a warranty deed is the same as a mortgage, which is an agreement between the buyer and lender in which the lender has the right to seize the property if the loan is not repaid.
What a warranty does is promise that the seller owns the property free and clear. What it does not do is prove ownership. While on its face a mortgage does not prove ownership, it is extremely unlikely that an individual would be making loan payments on a property that was not theirs.
Further, warranty deeds may be necessary when applying for a mortgage or buying insurance from a title company.
How to Get a Warranty Deed
A warranty deed can be obtained through a real estate agent. Or, an online template can be downloaded. So that these documents are legally binding, such deeds must be signed in the presence of a notary public.
Here are steps to getting a warranty deed:
- Get a copy of the real estate’s current deed.
- Specify the date of the deed to preserve the title history.
- Complete the warranty deed’s seller section.
- Complete the warranty deed’s buyer section.
- State the warranty deed’s consideration, which is the amount of money paid for the property for which the deed is developed.
- State the deed’s legal description.
- Get the property surveyed if the property has changed.
- Sign the warranty deed.
- File the deed.
Pros and Cons of a Warranty Deed
There are advantages and disadvantages associated with warranty deeds. On the plus side, a warranty deed protects the purchaser by guaranteeing a clear title and providing the current owner with the legal right to sell the property.
However, home buyers with a warranty deed may still need to get title insurance, which protects against losses while the grantor owns the property and covers claims after the property is sold. Why? Because title insurance covers a broader range of prospective claims. A warranty deed only covers the period the buyer owned the property. That means the buyer assumes a risk of possible issues that occurred before that period, which the seller need not address.
Note that when sellers sign a warranty deed, they pledge that there are no title issues. However, if an issue arises, they will not necessarily be protected.
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