A warranty deed is one of the most common ways to transfer a property from the seller to the buyer in a real estate transaction. Warranty deeds are crucial to the closing process and come in many different forms.
Those new to real estate investing or homebuying may be unfamiliar with a warranty deed or when and how to use one. This article will explain all the details and help you feel more informed and prepared when it comes time to close.
What is a warranty deed?
A warranty deed is a type of real estate deed or property deed that warrants the transfer of title from one party to the next. A warranty deed offers a guarantee that the deed is being transferred from or sold by the existing owner to the buying party, without any title defects, liens, mortgages, unpaid property taxes, or other encumbrances.
In other words, the property is being transferred and warranted with a clear title. It's the most secure type of deed to be transferred and is usually issued at closing after a full title search has been pulled to identify whether there are any title problems.
Types of warranty deeds
There are several types of warranty deeds, but the most common are general warranty deeds and special warranty deeds.
A general warranty deed means the grantor, or selling party, is held liable for any title issue that may be discovered after the deed has been transferred, providing the most protection for the grantee, or buying party. For this reason, it's the most common type of warranty deed used in real estate transactions, although the types of deeds used will vary by state and even particular transaction.
A special warranty deed, which can also be referred to as a limited warranty deed, is slightly less secure. This type of deed only warrants certain aspects of the sale deed, particularly that the grantor has received the title and that the property had no encumbrances while the grantor owned it.
That means the responsibility for any claims or lien issues that happened before the property was owned and that could potentially impact or prohibit the sale of the property in the future would fall on the grantee's shoulders.
How does a warranty deed work?
A deed is typically drawn up by the attorney or title company handling the real estate closing. Since it is a legal document, it's important to have someone familiar with and trained on the proper language requirements for the deed and who can help both parties fully understand what they are signing and/or warranting.
All warranty deeds will outline the real property being transferred -- including its legal description and, often, its parcel identification -- as well as the parties involved in the property transfer. A warranty deed will require signatures in front of a notary and, depending on the state, may require witnesses during signing.
After the execution of the documents and conveyance between parties, the deed is recorded in public records and returned to the grantee after the closing.
If you plan to get title insurance -- or are required by your mortgage lender to get it -- you will want to use either a general warranty deed or special warranty deed. While not required in many situations, title insurance can help cover the costs of rectifying a title defect if one is discovered at a later time, which is why many buyers choose to purchase title insurance.
There are certain instances when an investor may be unable or not want to purchase a property with a warranty deed because of known encumbrances by the current property owner. In this event, the seller can use a quitclaim deed -- wherein the selling party doesn't offer protections or warranties -- and rectify the title issues at their own cost.
A quitclaim deed can be risky, though. So, before using one, make sure you understand the extent of the defect you could be getting yourself into.
The Millionacres bottom line
Generally speaking, it's a good idea to have a firm understanding of how deeds work and what type of deed will serve your current transaction needs. Still, it's always recommended to use an experienced and qualified attorney or title company to help prepare the necessary closing documents, including the deed.