When buying property or certain other assets, you may be given a deed as part of the transaction. This deed not only transfers ownership of the property but also typically includes a description of what’s included (buildings, roads, etc.). In some cases, though, a deed will also disclose debts and other encumbrances that the property carries with it. Here’s a look at what role deeds play in the sale of property, and how you can protect yourself if you’re given a special warranty deed in particular. Consider working with a financial advisor as you consider a property purchase.
What Is a Deed?
A deed is a written document that effectively transfers the rights of a particular asset from one owner to another. Deeds are generally used to transfer the title for real property – such as land and anything on that land – or vehicles.
The deed on a property is different from that property’s title, which proves ownership. However, the deed is still considered legally binding as long as it meets all local requirements and is filed appropriately.
While the requirements will vary from state to the next, a deed usually provides specific details about the transaction such as:
- The name of the grantor, or seller
- The name of the guarantor, or buyer
- A description of the property and its location, such as plot address and property lines
- Rights offered by the deed, including property use limitations and other individuals or lenders who may be named on the property’s title
- Consideration, or what was exchanged for the property in question
- The signature of the grantor
Depending on your state, the deed may need to be notarized and even signed in the presence of witnesses. Then, it is filed and entered into public record.
Types of Deeds
There are a few different types of deeds that you may encounter. The most common are the general warranty deed, quitclaim deed, special purpose deed (such as a gift deed or executor’s deed) and the special warranty deed.
When buying property, you’ll most often encounter the general warranty deed. This deed assures the guarantor that the property they are buying is without claim and can be purchased without issue.
While general warranty deeds aren’t foolproof, they allow buyers to confidently enter the transaction without worrying that their new property has other legal owners who may challenge the title. Buyers can also rest easier knowing that no liens, debts, easements or additional encumbrances have been discovered on the title.
What if the property is later found to have encumbrances that weren’t mentioned in the deed? In that case, the grantor (seller) can be held liable.
Special Warranty Deeds: Definition, Uses
A special warranty deed works a bit differently, though. With a special warranty deed, a grantor is still responsible for naming any encumbrances on the property. This may include things like judgments and tax liens or property easements. However, the special warranty deed only requires sellers to guarantee that the property wasn’t encumbered while they themselves owned it.
This means that the grantor is not responsible for any encumbrances added to the property before they took ownership. If any previous title defects existed, the grantor is not liable for them, nor for failing to discover and disclose them to you.
Because of this, a special warranty deed offers buyers less protection than does a general warranty deed. Special warranty deeds are generally used to limit liability. They are especially common in situations where the grantor owned the property for a short period of time.
This includes temporary owners such as builders (who possess the property during construction) or banks following a foreclosure (before they sell the property to a new buyer). Because they owned the property for a short time, the special warranty deed allows them to limit their liability to the period of ownership only.
Special Warranty Deeds: How to Protect Yourself
Since a special warranty deed offers less protection than a general warranty deed, buyers may feel reasonably cautious about their purchase.
There’s always the chance that another owner could challenge the title. It could be the heir of a previous owner who claims that the property is actually theirs. Former creditors could always come out of the woodwork, as well. They may claim judgments or place liens on the property due to past owners’ debts.
Again: the grantor is only liable for their period of ownership when offering a special warranty deed. For this reason, buyers should consider purchasing title insurance to protect themselves.
Title insurance protects both buyers and other titled owners (such as a mortgage lender) if the property is later found to have title defects. This coverage is offered by the title company that’s contracted to research the title. It will protect against a variety of claims if anything is missed during the title search process.
The Bottom Line
There are many issues that can follow a property. Also called title defects, these issues include things like judgments, tax liens or easements … and if you’re buying a property with one of these defects, you will generally inherit the problem. A special warranty deed assures buyers that no new encumbrances were added to the property while that particular owner had possession. However, they make no guarantee regarding encumbrances on the property while it was held by previous owners. For this reason, special warranty deeds offer less protection than general warranty deeds. Buyers should strongly consider purchasing title insurance as a safeguard against previous or unknown title defects.
Tips on Real Estate
- Consider working with a financial advisor as you buy or sell real estate. Finding one doesn’t have to be hard. SmartAsset’s matching tool can connect you to several financial advisors in your area within minutes. If you’re ready, get started now.
- Whenever you’re preparing to sell or buy real estate, remember to consider your future tax liability. Profits from an asset that was held for under a year are taxed as normal income, while proceeds from an asset held for more than a year are subject to long-term capital gains rates. Use our capital gains tax calculator to find out what your tax bill will look like.
- Real estate investing can generate long-term wealth, but it also presents risks. Here’s an overview of this investing opportunity.
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