Warranty Deed: What You Absolutely Need to Know
Have you heard of the term ‘warranty deed’? And do you know how it protects your interests as a property investor? Find out more.
A warranty deed is a document commonly used in real estate transactions. It protects the grantee (the buyer) by guaranteeing that the grantor (the seller) of a property legally owns the property and that there is no outstanding mortgage, lien, or encumbrance against the property. Essentially, this means that the seller provides an assurance that the property is free from all encumbrances and that he has the legal right to sell the property to the buyer.
Types of warranty deeds
There are two types of warranty deeds, with each conferring a different level of protection.
General warranty deed
A general warranty deed offers the highest level of protection to the grantee, and it is also the most commonly used warranty deed in real estate transactions. With the general warranty deed, the grantor is responsible for any violation of the guarantees, even if the violation occurs without the seller’s knowledge, or if the seller was not the owner of the property at the time of violation.
Special warranty deed
Despite its name, the special warranty deed is less beneficial to the grantee, compared to a general warranty deed. A special warranty deed functions in the same way as a general warranty deed, except that it is only applicable to the specific time frame during which the grantor was the owner of a property. It only guarantees that the grantor is legally able to transfer ownership of the property, and that there is no claim against the property during which the grantor was the owner.
Therefore, unlike a general warranty deed, the special warranty deed does not provide an all-encompassing protection. It does not protect the grantee against claims prior to the time when the grantor received ownership of a property. These deeds are used by temporary owners, such as banks, who have acquired properties through foreclosure, and do not wish to bear additional risks.
How do warranty deeds work?
With a warranty deed, the grantor is guaranteeing these three conditions:
- The grantor owns the property and has the legal right to transfer the ownership of the property to the grantee;
- No money is owed to other parties associated with the property; the property is free of any outstanding claims, rights, or charges;
- The grantor will guarantee that the grantee gains the title to the property.
For the second condition, however, if a special warranty deed is involved, this claim is only valid for the duration in which the grantor was the owner of a property. If there are outstanding mortgages or liens against that property, which occurred before the grantor was the owner of the property, a special warranty deed will not be able to protect the grantee.
In addition, if there is any violation of the guarantees that were set out in the warranty deed, the grantee has the legal right to sue the grantor. So, due to the high risk that the grantor takes on as the party responsible for various claims, it is important for the grantor to have title insurance. The title company will conduct its due diligence, before the sale occurs, to ensure that there is no violation of the conditions spelt out in the deed.
Warranty deed versus quitclaim deed
Quitclaim deeds are also a fairly common type of deed in real estate transactions. Although both warranty deeds and quitclaim deeds transfer ownership of a property from one entity to another, a quitclaim deed does not guarantee the title status of the property, nor does it guarantee that there is no existing mortgage, lien, or encumbrance against the property. Despite this, a quitclaim deed is still a valid legal document, as long as the grantor truly owns a property and there is no existing problem to be aware of. Therefore, quitclaim deeds are used in potentially safer situations, such as transfers of ownership between family members.
When should I get a warranty deed?
You should preferably use a warranty deed when buying a property from a stranger, or if you just want to be guaranteed against any issues with the ownership of the property. A warranty deed may be required when you apply for a mortgage, or when a title insurance is used.
As a seller, you may obtain a warranty deed template via your real estate agent. As a buyer, you are also allowed to request a warranty deed as a condition for the transaction to take place to protect your own interests. If a seller is unwilling to provide you with a warranty deed, without a reasonable justification, that could potentially be a ‘red flag’ on the property’s ownership or the seller’s legal right to sell the property.
The Bottom Line
A warranty deed is an important tool to protect yourself, as a buyer, when executing real estate deals involving financial transactions and mortgages. Although quitclaim deeds provide the same function of transferring ownership of a property, it is safer to have a warranty deed to protect yourself from possible third-party claims and unnecessary legal complications.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.