Understanding how deeds work is vitally important for every real estate investor. There are several different kinds of deeds, and the type you get when you buy a property may affect whether you have recourse if there are any future claims. A clause in the deed may also limit what you can do with your property or require you to allow other property owners to cross your property to access theirs.
What Is a Deed?
A deed is a legal document that shows proof of ownership for a property. It contains information about the current owner, the person or entity that sold it, a physical description of the property, and other important information.
When you buy a property, the deed will state who the grantor is, which is the person or entity that is selling the property. The deed will also state who the grantee is, which is the person or entity that is buying or taking claim of the property.
There are several types of deeds, and the one used may affect how much protection you will receive when buying a property. The deed may also contain legally binding guarantees or restrictions on how the property can be used.
Difference Between Deed and Title
A deed and a title are not the same. A title gives a property owner the legal right to reside on and modify a property. The deed transfers ownership of a property from one owner to another.
Another way to view the difference between deed and title is in how the two terms are sometimes used. Someone may say “he deeded the property to me,” for example, to describe the process of transferring ownership. Someone may also say “I have the title to this land” to refer to owning a property.
Types of Deeds
There are several different types of deeds, and the one you receive will depend on how the property was purchased. Different types of deeds each have important stipulations that may affect how a property can be used.
Quitclaim deed
A quitclaim deed is used when ownership of a property is transferred to someone without being sold. It is a quick way to transfer ownership and is commonly used when a family member gives a property to another family member. Title searches are usually not done with quitclaim deeds.
Special warranty deed
A special warranty deed only involves the time that a seller owned a property. It does not offer any guarantees about a property when it was previously owned.
These deeds are also sometimes referred to as limited warranty deeds or grant deeds and are usually used in foreclosures. If a special warranty deed is used with a home that is part of an HOA, for example, the new owner will not be responsible for the previous owners’ association dues.
General warranty deed
General warranty deeds are among the most common deeds that real estate investors will encounter and are also sometimes referred to as warranty deeds. With this type of deed, the seller transfers ownership of a property to the buyer and guarantees that there are no liens or other claims. The property is owned free and clear. If it is later discovered that there is a claim to the property, the seller promises to pay to have the issue resolved.
Bargain and sale deed
A bargain and sale deed is commonly used when people buy foreclosures or properties at tax lien sales. These deeds do not guarantee that there aren’t any liens or other property claims. If it is later discovered that there is a claim to a property, the new owner will be responsible for it.
Deed of trust
A deed of trust is when the ownership of a property is transferred to a third party, like a bank. The third party then holds the property until the mortgage is completely paid off. These deeds are sometimes referred to as trust deeds, and some states require them when financing is used to buy properties.
Mortgage deed
A mortgage deed is when a lender places a lien on a property until the mortgage that was used to buy it is paid off. If the borrower defaults on the mortgage, the lender has a legal right to foreclose on the property.
Contents of a Deed
A deed usually includes certain information, some of which is required to make it valid. Here are some common terms you may encounter when reviewing a deed.
Parties involved
The parties involved must be clearly stated in the deed. There are typically two parties involved—the person who is giving up ownership (grantor), and the person who will be the new owner (grantee).
Property description
The property description is also sometimes referred to as the legal description. It is a description of the property boundaries and must include as much detail as possible to prevent confusion. If a survey of the property hasn’t been done, metes and bounds and recorded plats may be used.
Consideration
In legal terms, consideration refers to something of value that is promised to someone in a contract. A contract isn’t enforceable without consideration. Money is the most common form of consideration, but other assets may also be used.
Words of conveyance
In a contract, words of conveyance refer to the clause that transfers property ownership from one person or entity to another. If the words of conveyance aren’t clear, it could result in legal challenges in the future.
Covenant
A covenant is a promise made in a contract to the other party that something will or will not be done. An example is when a grantor makes a “covenant of title,” which is a promise that there are no liens or claims to the title.
Warranty
A warranty is a statement attesting to or guaranteeing that something mentioned in the contract is true. If it turns out to not be true, the affected party may negotiate or sue for damages. An example of a warranty is when a grantor guarantees that a property is in full compliance with all building codes and zoning regulations.
The Deed Conveyance Process
The time it takes to get a deed when buying a property will vary depending on different factors and could take anywhere from a few weeks to a few months. Generally speaking, there are three parts to the deed conveyance process: deed preparation, signing of the deed, and recording of the deed.
Preparing the deed
A deed must be prepared before both parties can sign it. The first step is to select the type of deed (e.g., warranty deed, quitclaim deed, bargain and sale deed, etc.). The deed is then drafted to include all relevant information.
The names and addresses of the grantor and grantee are included with the property description. Additional information may include covenants and warranties, consideration, words of conveyance, and other important clauses.
Signing and notarizing the deed
After the deed is prepared, both parties and their attorneys will review the document to make sure all the necessary information is included and that it is correct. The grantor will then sign the deed in the presence of a notary public.
Recording the deed
After the deed is signed, it is then delivered to the grantee, which may be done at the closing. The deed is then recorded by the county recorder, registrar, or clerk and becomes a public record that anyone can look up. The office where deeds are recorded varies depending on where the property is located.
How to Obtain a Deed
There are several ways that property can be obtained, and a new deed will need to be prepared each time there is new ownership. The type of deed that is used may be different depending on how the ownership of the property is transferred.
Inherited property
When someone passes away, the property is typically passed on to one or more heirs. Before a new deed is prepared, the property may go through the probate process, a legal process that is used to determine the heirs, settle debts, and distribute assets. An executor’s deed is usually used to transfer ownership from the estate to the heirs.
Purchased property
Buying property is the most common reason that new deeds are prepared. Property may be purchased by real estate investors, homeowners, and businesses for many different purposes. Property may be bought directly from a seller, but it may also be purchased at auction, from a lender after a bank foreclosure, or at a tax lien sale. The type of deed used when property is purchased will vary and could be a warranty deed, special warranty deed, bargain and sale deed, or something else.
Gifted property
A property may be given to someone without being sold. This is most common with family members. A parent may want to help a child get a head start in life, for example, by buying them a starter home. When property is gifted, a quitclaim deed is usually used.
Property transfer
In some cases, property is transferred from one owner to another without being sold. A property could be gifted to a charitable organization, for example, or transferred to a trust for estate planning purposes. Property ownership may also need to be transferred in a divorce. In these cases, a quitclaim deed is usually used.
Common Deed-Related Terms
Understanding some of the common terminology used in deeds may help you know if there are any important stipulations that may limit what you can do with a property. It may also help you identify issues that may affect your ownership of the property, like with an encumbrance.
Easements
An easement is a right of way that is granted to a person, business, or government. An example of an easement is when a utility company has the right to be on a property to access power lines. Another example is when a property owner is only able to access their property by crossing someone else’s property.
Encumbrances
An encumbrance refers to anything that could affect a property’s title or how it is used. Liens, which are legal claims to a property’s title, are common encumbrances. A deed restriction is another type of encumbrance. A deed restriction from an HOA or zoning regulations, for example, could prevent an owner from building a swimming pool, changing the color of a building, or something else.
Grantee
A grantee is someone who is receiving a property when ownership is being transferred. The grantee is usually responsible for having a property inspected and a title search done prior to a transfer. A grantee is usually someone who is buying a property, but it could also be someone who is receiving property as a gift or inheritance.
Grantor
A grantor is someone who is transferring ownership of a property to someone else. A grantor could be a homeowner, real estate investor, or business. It could also be a bank or credit union, for example, after a loan default when there is a property foreclosure. The grantor is usually responsible for preparing a new deed in a property transfer.
Restrictive covenants
A restrictive covenant is a clause in a real estate contract that limits how a property can be used. Restrictive covenants are common with HOAs, for example, to make sure all the homes in a community adhere to certain standards. A restrictive covenant in an HOA community could prevent a homeowner from running a business out of their home, parking an RV in the driveway, or painting the exterior certain colors.
Final Thoughts
Deeds convey important information when transferring property from one owner to another. They may warrant or guarantee certain things or prevent you from doing certain things with your property. Understanding the different types of deeds and their components whenever you buy and sell properties may also help to prevent future problems.
Although deeds are not difficult to understand, it’s important to have a real estate attorney review a deed before you sign it to make sure everything is correct. Also, be sure to consult with a real estate attorney if you have any questions or concerns about a deed.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
