As someone who is buying or selling a house, you have an incentive to transfer property title in a way that best protects you. When it comes to real estate, property ownership is transferred using a legal document called a deed. Within the deed, umbrella lives several different types of deeds, each with unique purposes, advantages and disadvantages. Some are more advantageous to the seller, while others are more advantageous to the buyer. Which deed you end up using is often determined through the negotiation process. Today, we’re going to hone in on a particular type of deed: the special warranty deed. Keep reading to find out if this is the type of deed that might offer you the best protection.
What is a Special Warranty Deed?
A special warranty deed is a type of real estate deed used to transfer property ownership from one person to another. By using this particular deed, the seller is guaranteeing to the buyer that there are no defects or problems with the property title during the time that they owned the property. However, they are not guaranteeing the condition of the title any period of time outside of the ownership. In other words, a special warranty deed offers a buyer some protection, but leaves them exposed to older title claims.
In the rest of this guide, we’ll expand upon the special warranty deed definition by answering common questions, such as how special warranty deeds work, and when you should opt to use them over other types of deeds.
How Does a Special Warranty Deed Work?
If you’re wondering why you’ve never heard of a special warranty deed before, it’s probably because it’s most often used for commercial real estate transactions.
Commercial real estate includes properties such as multifamily housing, office buildings, retail spaces, industrial warehouses, and the like. In other words, it’s real estate that’s used for business purposes. Commercial property owners typically lease units to commercial tenants, but there may come a time when they need to sell it.
When they go to sell the property to a new owner, they typically use a special warranty deed. It goes by different names, including covenant deed, grant deed, and limited warranty deed. So what’s getting guaranteed? It’s the period of time that this particular seller owned the property. If any title issues from this time period comes up, the seller will be held liable.
This could include issues such as debts, encumbrances, or any other title-related issues. It doesn’t matter if the seller caused the issue, or if the issue came up during their ownership period. They are held responsible for mitigating the issue, and not the buyer.
However, the deed won’t protect the buyer from any title issues that come up from before the seller’s ownership period. The buyer assumes this risk by agreeing to the special warranty deed.
What Is Included in a Special Warranty Deed?
For a special warranty deed to be legal, it must include some information:
The seller’s name and address (known as the “Grantor”)
The buyer’s name and address (known as the “Grantee”)
A legal description of the property, including property lines and lot number, which can be found on the existing deed
A formal statement from the Grantor (seller) describing their intent to convey the property to the Grantee (buyer)
So far, the descriptions above are standard for any deed. To make the deed a special warranty deed, it also must include:
A statement from the Grantor that they are the legal owner of the property and thus have the legal right to transfer title
That they have no outstanding claims against the property (that they know of) that were establishing during their ownership period
They guarantee that they have a clear title (during their specific period of ownership), but that the guarantee does not include any time period before the Grantor’s ownership of the property
When is a Special Warranty Deed Used?
Aside from the sale of commercial real estate, special warranty deeds are often used as a result of the foreclosure process. A home can be foreclosed upon by a bank or other mortgage lending institution if the owner fails to pay their mortgage. Once the property is foreclosed upon, the bank can legally sell the property to another owner. The special warranty deed protects the bank because they are providing zero protection for the period of time before it seized ownership of the property. The new buyer has no guarantee that the title is free-and-clear since it was very recently owned by someone who failed to pay their mortgage. Buyers often choose to buy foreclosure properties despite this risk because they are such a steal.
What is the Difference Between a Deed and a Special Warranty Deed?
A mortgage deed is a legal document that simply transfers property ownership (property title) from one individual to another. This transaction could take place between a buyer and a seller, or even a relative and their loved one. In this sense, a deed has no special catches or stipulations.
In comparison, a special warranty does have a specific stipulation. As we’ve explained so far, it’s only providing a warranty for the time period during which the owner held title to the property. Not one day before, and not one day after. This is wise, as it would not make sense for an owner to volunteer to be held liable for any title issues that took place before they owned the property. However, a buyer would be wise to make sure that the property in question has no title issues associated with it.
Two other types of deeds that are commonly used are the general warranty deed and the quitclaim deed. The general warranty deed is often used in residential real estate. (Remember, special warranty deeds are usually used for commercial real estate and foreclosure properties.) This type of deed guarantees that the title is owned free-and-clear, regardless of the ownership timeline. Because it covers the property’s entire history, it gives the buyer plenty of assurance.
Last but not least is the quitclaim deed. By using this deed, the current owner is simply extracting any and all rights that they might have to the property. They are not making any statements about how much interest they have in the property, nor are they making any guarantees. Quitclaim deeds are often used for informal transfers of property ownership, such as between a parent and a child, or when a Trustor wants to fund their Trust with real estate.
Are Special Warranty Deeds Bad?
While special warranty deeds are not “bad,” it’s worthwhile to consider whether or not it’s advantageous to use one based on your personal circumstances. For example, if you are selling a property, a special warranty deed can be great. You’re only making guarantees about the property for the time period that you owned the property. You wouldn’t want to make any guarantees pertaining to property’s history before you owned it.
However, as a buyer, there are other deeds that would offer you more protection. Even if the current owner is offering a guarantee for the period of time that they owned the property, they’re not making any guarantees about the period beforehand. What if some type of creditor from decades ago came to haunt the property? Instead, you might want to demand a general warranty deed. This type of deed guarantees that the property title is free and clear of any liens, debts and encumbrances, regardless of timeline.
Do I Need a Special Warranty Deed?
If you’re wondering if you need a special warranty deed, ask yourself if it would be the best option for you. Are you an owner who isn’t sure about your property’s history? Do you own commercial real estate? Are you a representative of a bank who just foreclosed on a property? Then, your answer could very well be “yes.” However, if you’re a buyer, then you’d likely want to opt for a different option that offers even stronger protection.
Create Your Estate Plan Today to Protect Your Assets
The key takeaway for this guide is that the special warranty deed is just one of several types of deeds used to transfer property ownership, and that it may or may not be the best option for you. It’s always important to evaluate what your personal incentives are, and find out how you can obtain the type of deed that will best protect you. This is where the real estate negotiation process becomes important. The other party involved in your real estate transaction has their own set of incentives as well. The type of deed they want to use may be different from yours. Stay firm, and do your best to obtain the deed that works for you. If they won’t budge, it may be wise to walk away from the deal.
If you’re in the process of executing a real estate transaction, then don’t forget to think about your Estate Plan. Buying, selling, and gifting real estate are all “trigger” events that should remind you to either create or update your Estate Plan. This is because real estate is a significant asset that you’ll want to preserve and protect immediately. For instance, you might want to bequeath your new home to someone you love using your Will. Alternatively, you might want to fund your family Trust with a home you just purchased by using a quitclaim deed. Regardless of your objective, a real estate transaction almost always requires an Estate Plan action.
Don’t worry! This might sound like a difficult task, but it doesn’t have to be. At Trust & Will, we make it easy and simple to either create your Estate Plan, or update it periodically. You’ll feel more empowered knowing that you can easily manage your Estate Plan such that it always stays up-to-date and matches whatever is going on in your life. Ready to take action and get your assets in order? You can get started by clicking here!
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