Various Types of Deeds Used in Real Estate Transfers
To effectively understand what gets transferred or conveyed by signing a deed, it is important to understand the interest owned by the Grantor of the deed. In most real estate transactions involving a Purchaser, Seller, and Lending Institution, the type of interest being conveyed is called Fee Simple Interest.
These are the following general types of Fee Simple Interest:
- Absolute Fee Simple Interest: This is the unrestricted power to sell the real estate. This is the type of interest most Sellers have and convey to Purchasers
- Defeasible Fee Simple Interest: This is an interest conveyed in real estate which can be defeated/cancelled upon some future event. This is the type of interest that Purchasers convey to their Lending Institutions. They convey their Unrestricted power to sell the real estate and re-acquire the right once they pay in full their mortgage obligations.
- Equitable Interest: Purchasers by contract to purchase agreements, land contracts, and lease agreements acquire interest less than fee simple in nature. They do not have an unrestricted power to sell the property, but they do have rights to sell, mortgage or inhabit.
The Purchaser in a traditional sale is acquiring from the Seller, all of the Seller?s right, title and interest in the property, including the unrestricted power to sell the property in the future. Without these matters, what would the Purchaser be buying and what would its value be? Likewise, a Lending Institution loans money to the Purchaser based on the value of the collateral. If the collateral (property) cannot be sold for the value assigned to it, then the Lender takes a different approach to lending the Purchaser the money. The Lender therefore, requires the Purchaser to acquire the unrestricted right to sell the property and to convey that right to the Lender in the case where the Purchaser does not meet the Lender?s requirements in their loan documents (i.e. Payments and other conditions).
TYPES OF DEEDS
Like the types of ownership interest conveyed that we spoke of above, deeds come in various forms and can affect the type of ownership a person ultimately acquires. We?ll discuss below some of the more common types of deeds used in real estate transactions and some of the issues you should consider when dealing with ?special? sales. As we go through the types of deeds and the deals they are commonly used in, remember the various types of ownership interests (Absolute Fee, Defeasible Fee, and Equitable Interests) and that Absolute is a greater interest than Defeasible and Defeasible is greater than Equitable and how one type can ?merge into? or become a greater interest.
The type of deed used deals principally with the ?warranty? of title being conveyed from the Seller (or Grantor) to the Purchaser (or Grantee). When someone warrants the title to the Purchaser they can do so in the following deed types:
General Warranty Deed: Here the Grantor conveys to the Grantee all of their right, title and interest in the real estate, without limitation, and assures the Grantee that the Grantor is lawfully the owner of the property, that it is free and clear of all encumbrances, that the Grantor has the unrestricted power to sell the property (absolute Fee Simple) and that the Grantor will further protect and defend the same for the Grantee from all claims arising from all persons. This is the most common type of deed used in traditional real estate closings in a sale and the deed type required in the DABR contract to purchase. If your deal is a ?special? deal where this type of deed should not be used, you should consult your Broker about modifying the DABR?s contract requirement for this type of deed.
Limited Warranty Deeds: Here the Grantor conveys to the Grantee all of their right, title and interest in the real estate, and assures the Grantee that the Grantor is lawfully the owner of the property, that it is free and clear of all encumbrances, that the Grantor has the unrestricted power to sell the property (Absolute Fee Simple), but that the Grantor WILL NOT protect and defend the Grantee from all persons claiming a right or interest in the property, but ONLY from persons making a claim through or under the Grantor. This means that the Grantor will not defend the Grantee from persons making claims from the past or against former owners. If you are dealing with a Bank Owned Property (REO) the deed the Purchaser will likely receive will be this type of deed. Corporations and Partnerships like to give this type of deed, but most times without good reason.
Fiduciary Deeds: When a representative for the owner is charged with conveying real estate, it is traditionally performed by the use of this type of deed. Since the representative is not the owner, they are often times unable to have the knowledge of the property to warrant the condition of title to the purchaser. Therefore, the Grantor in this type of deed states to the Grantee that they are the duly appointed and qualified representative of the owner, and that the owner has the unrestricted power to sell the property (Absolute Fee Simple) and that all of the legal proceedings leading up to the deed have empowered the representative to convey the property and that he has authority to do so. These are the only warranties made in a Fiduciary Deed. Examples include Executor?s of estates, Trustees of Living or Family Trusts and Sheriff?s Deeds from foreclosure sales.
Quit Claim Deeds: Here the Grantor conveys whatever interest they may have in the real estate to the Grantee without any warranty whatsoever. So, if the Grantor has no interest in the property then the Grantee will receive no interest. These deeds are typically used in transactions to clear previous mistakes in the chain of title where the Grantor wants no future obligations concerning warranties. Divorces are a chief source for Quit Claim Deeds where the one party is ordered to convey the property to the other.
TYPES OF VESTING:
Easily confused with types of Ownership Interests and Deeds is the manner in which a Grantee is said to hold title to property. We call the manner in which someone ?holds? title vesting or tenancy. Here are some of the ways an owner can hold title:
Tenancy in Common: Where two or more individuals hold title in respective fractional interests, and can convey them separately or jointly, to third parties. The death of an individual does not transfer the ownership interest to the other party, but is subject to distribution pursuant to the law of descent and distribution or their will.
Survivorship Tenancy: Where two or more individuals hold title in respective fractional interests and cannot convey their interests separately to third parties, but only jointly. If the interests are equal, then we call this Joint Survivorship Tenancy. Upon the death of a survivorship tenant, the interest of the decedent passes directly to the surviving tenant and not pursuant to the law of descent and distribution or their will.
Transfer on Death Tenancy: When a Grantee takes title to property and it discloses a beneficiary upon their death, then the beneficiary has interest in the property only upon the event of death of the Grantee and like the Survivorship Tenancy it is not subject to will or Probate considerations.
Dower: While never appearing on a deed, a spouse of an owner of real property has a unique interest known as dower. Like the Transfer on Death Tenancy, the right of dower lays dormant until the happening of an event like death or divorce. When the owner dies or divorces, his spouse receives an undivided 1/3 interest in a Life Estate in all real property owned by the owner during the marriage. This ?inchoate? interest rises and falls in an instant. If there was property during the marriage that the spouse did not release their interest in when it was conveyed, then the dower attaches to the property, and the new owner or lender will have issues to deal with.
THE ROLE OF TITLE COMPANIES
With everything that we just said, there is no way to regard any deed preparation as an easy thing. Word Processors and Software systems make the preparation of deeds much easier than in the past, but overlooking the parties? interests and intentions can make an easy deed into a bad deal. It is important that your clients understand the type of ownership interest, deed, warranties of title, and tenancy they will be acquiring and committing themselves to in every deal. Likewise, as their agent, you will need to be prepared to discuss these matters with the clients and title companies involved in your transactions, so everyone?s expectations are met. Before you fill out the ?Make Deed To? area of your next contract, think about the unique situation your deal presents and if these many options are best for your clients.