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Warranty deed, special warranty deed, quitclaim deed... not all deeds are created equal. With many different types of deeds, the topic can be confusing for real estate investors. So why bother?
As an investor, it’s important that the transactions that you participate in give you full legal rights to the property.
While real estate fraud isn’t that common, it’s not unheard of. One in 164 mortgage applications were estimated to have indications of fraud in Q2 of 2020.
You and your real estate business certainly don’t want to be a part of that statistic.
A special warranty deed can offer the protection that you need.
What is a Special Warranty Deed?
A special warranty deed is a tool that many real estate investors use in order to ensure that the property they are investing in has a clear title.
With a special warranty deed, the seller of a property guarantees the buyer that the subject property has been clear of any liens, clouds, or encumbrances during their ownership of the property.
These issues can greatly diminish the value of a property.
Keep in mind that the seller is not liable for any liens or claims against the property that may have occurred before they purchased it. A special warranty deed guarantees what happened during their ownership.
As an investor, a seller’s refusal to offer a special warranty deed is a major red flag.
If you are considering investing in a property where the seller refuses to offer such protection, it may mean that the seller does not have the full legal right to sell the subject property.
Special Warranty Deed vs. Warranty Deed
How is a special warranty deed different from a warranty deed? A special warranty deed only covers the ownership of the current owner. General warranty deeds guarantee that the property is completely free of liens, clouds, and other encumbrances, dating back to previous owners of the subject property.
When is a Special Warranty Deed Used?
There are generally three types of real estate transactions in which a special warranty deed is used.
Commercial Property Transactions
If your investment strategy includes the purchase of commercial properties, you should certainly consider a special warranty deed.
Most businesses are aware of issues that surround the ownership of their buildings, so having a special warranty deed in place often provides ample information about the validity of a transaction.
Since special warranty deeds only discuss the validity of ownership of a property during the current owner’s tenure, they are often used on foreclosures.
Obviously, there are clouds and liens against the property, but a special warranty ensures that the person selling the property has the full legal right to do so.
When an individual is serving as the administrator of an estate, he or she may have little knowledge about the history of the property. However, a special warranty ensures that they have the full legal right to sell you the property.
While that doesn’t answer all of your questions concerning the property, it does provide a good starting point.
Advantages & Disadvantages of a Special Warranty Deed
Next, we’ll look at the advantages and disadvantages of a special warranty deed.
Pros and Cons for the Buyer
A special warranty deed does guarantee that the person selling the property has the right to do so. The buyer won’t have to worry about spending time and money on the deal, only to find out the seller didn’t have the legal right to do so.
However, that is all that the special warranty deed conveys. There is no guarantee that there aren’t past liens and encumbrances on the property, which could result in legal action being taken against you and the property. For that type of protection, you will need a general warranty deed.
Pros and Cons for the Seller
There are also pros and cons for the seller when dealing with a special warranty deed.
The seller is legally responsible for the information provided in a special warranty deed. If they do not have the full legal right to sell a subject property, even if they believe that they do, they put themselves in a position to be sued should the property not be free of encumbrances.
However, being able to offer a special warranty deed does increase the likelihood of selling the property, as investors generally look for properties that provide this level of protection.
Special Warranty Deed Templates
Here are a few special warranty deed form examples that you can download and use in your upcoming transaction:
The Bottom Line: Special Warranty Deed
As an investor, you should try to purchase properties that come with a special warranty deed.
Doing so ensures that the person selling you the property has the right to do so.
In addition to finding a special warranty deed, it is also a good idea to obtain title insurance to further protect you against any issues associated with the subject property.
While a special warranty deed does not give you a guarantee about the property’s full history, it does ensure that the transaction that you are participating in is legal.
Failure to obtain tools such as a special warranty deed may put you in a position to find yourself in litigation surrounding a property that you have just purchased.
Instead of wasting your time and money defending your ownership of a new property, insist on a special warranty deed to put yourself in the best possible position to succeed in your investment.