Real estate professionals know that there are several commonly accepted means for a property to be transferred between buyers and sellers. Different methods of transfer are used in superficially similar situations depending on the nature of the sale and the identity of the parties to the transaction. In other circumstances, the correct means of transfer should be far clearer.
If you are a buyer with little to no real estate experience, it is important for you to educate yourself on the different types of deeds that are commonly used. General and special warranty deeds come with several subtle differences that are important to point out. These differences make them suitable for different types of transactions between interested parties.
What are Warranty Deeds?
Warranty deeds provide the buyer protection. The deed includes a legal description of the property, the names of those transferring the property and those who are taking ownership. The warranty deed is needed to ensure the new owner’s valid interest and give them legal recourse against any future property claims.
General Warranty Deeds
A general warranty deed is the “standard” means by which real property transfer happens in the United States. This type of deed provides the buyer with a warranty that the title to the property in question is free from encumbrances and won’t be the subject of any pending legal actions or title issues.
A general warranty confers full rights of ownership and disposal to the buyer. In order to ensure they won’t face title challenges, buyers should verify that the property in question features an “unbroken chain” of general warranty deeds stretching far back in time. This chain of deeds shows future owners that they will face no title challenges.
Here are some things guaranteed to the buyer through the general warranty deed:
- The seller defends the title to the real estate agent against the claims of all persons.
- The seller has the right to convey the real estate.
- The seller warrants that the seller owns all of the rights in the real estate.
- There are no encumbrances against the real estate. Those encumbrances could include an easement on the property, a judgment lien against the property, or anything else that could impact the use of the property or can control how to use the real estate.
Special Warranty Deeds
A special warranty deed provides assurance that the property’s seller owns the property in question and has not faced any title issues during this ownership. A special warranty deed guarantees that the buyer won’t face any legal action or title issues as a result of the actions of the property’s previous owner.
A downfall is that this type of deed does not offer any guarantees that prior owners owned the property free and clear. Because of this, a special warranty deed is not a link in an “unbroken chain” of ownership that general warranty deeds may provide.
While utilizing a special warranty deed, the seller will defend the title to the property against the claims of anyone challenging actions based on the most recent ownership, but no previous buyers or sellers. A special warranty is more restrictive since claims are only being defended from one party.
Understanding the Difference
As long as your transfer of property doesn’t cause any problems, it shouldn’t matter what type of deed you receive. Unfortunately, title problems do arise, and the type of deed warranty you received will make a big difference to you.
A common problem that arises occurs with office buildings. Say you purchase an office building this year that you know was built two years ago. In that time there were two owners of the property before you obtained the title. You received a special warranty deed claiming the seller was free and clear of any legal issues and now you have the rights to the property. Unfortunately, the original owner did not pay their property taxes and the county has a lien on your building.
This type of scenario can be easily avoided through a general warranty deed, allowing you to see all history of the property and prepare you for any issues. Because special warranty deeds only offer guarantees about the previous owner, they are usually only used by two property owners who have had prior professional or personal relationships.
Avoiding Special Warranty Deeds
If you are unfamiliar with the seller or the property and are unsure of the history of the property, you should avoid a special warranty deed. Get your attorney involved before signing any contracts to ensure the language of the contract is not hiding any information from you as a new buyer. Your attorney can perform a title examination to determine any encumbrances on the property that are not clearly outlined on the deed. These protections will help ensure you will not have any problems in the future.
Watch Out for Quitclaim Deeds
Even though a special warranty deed is not as secure as a general warranty, they both offer more protection than a quitclaim deed. These deeds are used to facilitate the gifting of real estate between family, friends, or business partners. This is the only time a quitclaim deed should be used. Do not agree to this type of deed if you are not familiar with the seller.
Title Insurance and Final Thoughts
No matter the type of deed you receive, it is always important to obtain title insurance. Lenders require buyers to obtain title insurance throughout the course of any United States-based real estate transactions that involve the issuance of a primary or secondary mortgage.
The title insurance is designed to protect you against financial loss in the event of “pending” issues or other defects with previous ownership arrangements. Title insurance is particularly helpful to those who receive a special warranty deed to help protect their finances and ensure they are mitigating risk.
As always, it is important to obtain guidance from a real estate lawyer if you are inexperienced and attempting to enter a binding agreement.
