As a real estate investor, you need to understand the possible risk of claims against a new property acquisition by prior owners, lienholders, or stakeholders. You also need to understand which guarantees you can offer to a buyer when you’re ready to sell a property. These ownership rights and claim protections are all outlined in property deeds.
In this article, we’re providing a comprehensive guide to deeds for real estate investors. We’ll explain:
- What a deed is,
- How a deed is conveyed,
- Which type of deed is appropriate under certain circumstances,
- Why deeds are so important to real estate investors, and
- How to minimize deed-related risks when investing.
Here is everything you need to know about deeds as a real estate investor.
What is a Deed?
A deed is a legal document that transfers real estate ownership from one party to another. According to US law, deeds must be in writing; verbal statements, even if recorded, are not lawful deeds.
Do “Deed” and “Title” Mean the Same Thing?
The terms “deed” and “title” are closely related, but they are not the same thing. While a deed is a document used to record the ownership transfer of a property, title is the conceptual right to own, use, modify, and sell the property. A deed is the instrument used to transfer title.
What Information is Listed in a Deed?
Deeds contain important information about the transfer of the property. This information typically includes the following:
- The grantor and grantee. The grantor is the party giving up ownership of the property, and the grantee is the party the property is transferring to. The parties to a deed can be individuals or business entities.
- A legal description of the property. While the property address may be listed for simplicity, the deed will also include a “legal description” which provides more detail about the geographic boundaries to avoid confusion. The legal description typically references the location of the property based on the assessor’s records or land surveys, such as parcel numbers, block and lot numbers, or metes and bounds.
- Consideration. Consideration is the legal term for payment. What is the grantee giving up in exchange for the property? In most cases, the consideration is money, but it could also be other assets (such as a trade for another property). In some states, a “no-consideration” deed can be used in special circumstances (as we will discuss shortly).
- Words of Conveyance. This is the clause that expressly states that the property is changing ownership.
- Covenants. Covenants are legal promises. For example, a grantor often makes a “covenant of title,” which is a promise that there are no other known claims against the title.
- Any Encumbrances. An encumbrance is a claim against, or restriction on, a property. This can include liens (debts owed on the property), restrictive covenants (such as building restrictions or homeowner’s association regulations), and easements (special-purpose access rights for non-owners).
- Any Warranties. Warranties are guarantees. A grantor, for example, might offer a warranty to confirm that the property is in compliance with zoning regulations.
How a Deed is Conveyed
A deed is conveyed in a simple four-step process:
- Drafting. The deed is typically drafted by the grantor, with the help of a real estate attorney or title company.
- Reviewing. Both parties review the prepared deed (typically with their attorneys and/or real estate agents) to make sure all relevant information is present and correct.
- Signing. The grantor signs and dates the approved deed. This is done in the presence of a notary public who confirms the identity of the grantor and witnesses their signature.
- Recording. Once the deal is complete, the grantor provides the signed deed to the grantee, who submits the document to the county recorder, registrar, or clerk (according to the local process) to be recorded as public record.
8 Common Types of Deeds
Different types of deeds are used for different types of transfers. Here are eight common property deed types.
1. General Warranty Deed
A general warranty deed offers the highest level of buyer protection by guaranteeing that the grantor holds clear title to the property and has the exclusive right to sell it. It also includes warranties protecting the buyer from any future claims on the property.
A general warranty deed is often used in traditional real estate sales where the buyer does not personally know the seller.
2. Special Warranty Deed
A special warranty deed (sometimes called a limited warranty deed or a grant deed) offers grantees only against claims that may have come up during the grantor’s ownership period. This deed does not guarantee against claims that could have come up before the grantor's ownership.
A special warranty deed is often used in commercial real estate transactions or residential transactions when the grantor owned the property for a short period. For example, completed house flips may be transferred by a special warranty deed.
3. Quitclaim Deed
A quitclaim deed transfers the grantor’s ownership interest without providing any guarantee or warranty to the grantee.
A quitclaim deed is often used to transfer property between family members. For example, a quitclaim may be appropriate when aging parents pass property to their adult children or when releasing ownership to a spouse during a divorce. It is also a tool for clearing up title issues. For example, if a name is misspelled on the title, a quitclaim deed can be used to correct the record.
4. Deed of Trust (Trust Deed)
Deeds of trust transfer ownership of a property to a third party, like a financial institution, called a trust.
This is common in states where the lender holds the title until the mortgage is paid in full. Once the mortgage is paid off, the lender transfers the title to the homeowner.
5. Bargain and Sale Deed
A bargain and sale deed does not guarantee that the property is free from claims. If a claim comes to light, the new owner will be responsible for satisfying the claim.
Bargain and sale deeds are often used in foreclosure sales or tax sales where the extent of potential claims against the property might be unclear.
6. Executor’s Deed
An executor’s deed is used specifically when transferring property from the estate of someone who is deceased. The executor of the estate (as authorized by a will or by a probate court) can transfer real estate to a beneficiary or sell the property to a buyer with an executor’s deed.
7. Sheriff’s Deed
A sheriff’s deed is used to transfer property that has been legally seized by local law enforcement. For example, if assets are being repossessed to repay outstanding debts, a sheriff could be authorized to sell the real property owned by the debtor. The ownership would pass to the new buyer via a sheriff’s deed. Issued after a foreclosure auction to indicate the buyer at the auction. This deed typically does not guarantee a clear title.
8. Tax Deed
A tax deed is used when a property is sold by the government to recover unpaid taxes. This is similar to a sheriff’s deed but is specific to tax auctions. As with a sheriff’s deed, a tax deed typically does not offer any warranties.
Why Deeds Matter to Real Estate Investors
Deeds are critical for all property owners. As a real estate investor, you acquire and dispose of more properties than the average person, so it’s even more important for you to understand how deeds work and what protections they offer.
When you’re buying new properties to build your real estate portfolio, you need to know what warranties the sellers/grantors are making with the deeds they transfer to you. You may prefer a low-risk general warranty deed from a traditional seller. Or you may be willing to tackle a distressed property with a riskier tax deed or bargain and sale deed if it means acquiring the property below market value.
When you’re ready to sell your assets (or transfer them to a trust or beneficiary), you need to know which guarantees you can make and choose the appropriate deed to correctly convey your ownership interest.
How to Minimize Deed-Related Risks as an Investor
The best way to minimize deed-related risk is to leverage the expertise of professionals. You could, for example, hire an experienced real estate attorney to review the deed before finalizing any purchase or sale.
Or you could invest in real estate syndication rather than traditional investment property ownership. Similar to crowdfunding, syndication pools funds from multiple investors to finance a specific real estate project. The project could be a built-to-sell multi-family development, a value-add multi-family rental, or any number of other models. The project would be professionally vetted and managed by a real estate sponsor, who would handle every detail for you, including the deeds. This means you can spend less time and energy on the minutiae of investing, and more time and energy on things that matter most to you.
Learn more about real estate syndication, and explore stress-fee syndicated investment opportunities today!