CHAPTER
12

Deeds and Titles

In This Chapter

A title is an ethereal object. You can’t touch it, see it, feel it, or hold it. You can see the title insurance policy or the deed, but not the title itself. It doesn’t physically exist. However, the title is a very important concept in the real estate transaction.

In this chapter, we will cover the aspects of title: what it is, how it’s created, its purpose, and how to transfer title to a new owner. The deed, a physical representation of the title, is a legal contract and as such must meet all the requirements of a valid contract. We will discuss the parts of a deed and how they are created. We will discuss the different types of deeds used and what guarantees, or warranties, the seller makes to the buyer. We will also discuss the mechanics of a closing and how the deed and title play an important role in the transfer of the real property between the parties.

What Is a Title?

A title serves two purposes: it provides evidence of ownership of the property, and it provides evidence that you have the right to sell or transfer the property to another person.

A title also can be defined as the possession of the legal bundle of rights, in whole or in parts. The possession of the legal bundle of rights is not the same as possession of the property itself. A person may hold possession through a lease but not hold the full bundle of legal rights.

A title also can be held as actual ownership in the property, called legal title, or by holding an interest in the property, called equitable title, through such vehicles as a land contract.

DEFINITION

A land contract is a form of ownership conveyance between a vendor seller and vendee buyer. With a land contract, land ownership is transferred based on the portion of equity earned through each payment from the vendee to the vendor, giving the vendee an interest in the property based on the equity earned, hence equitable title.

What Is a Deed?

A deed is a document used to transfer ownership from one party to another, such as in a sale, gift, or transference by will. All 50 states, under the statute of frauds, require the deed to be a written instrument used in the transfer of real property.

Using the deed as the vehicle, the person transferring the property, called the grantor, transfers ownership to the person receiving the property, called the grantee. The grantor executes, or signs, the deed; the grantee does not.

HELPFUL HINT

Two distinct legal suffixes are used throughout the real estate industry, -or and -ee. -or is used to determine, explain, or identify the person doing the action in question: grantor, lessor, mortgagor, vendor, etc. -ee is used to identify the person receiving the action: grantee, lessee, mortgagee, vendee, etc.

Contractual Requirements for Valid Deeds

A deed is a legal contract, and as such, it must fulfill all the requirements of a legal contract. State laws may vary, but for a deed to be valid, it must contain the following necessary elements:

The grantor must be of legal age to hold or transfer property; in most states, the age of consent is 18 years old. A deed executed by a minor would generally be considered voidable in a court of law. However, after the minor reaches age 18, he or she can choose to accept the deed as valid conveyance or have the conveyance recognized as nonlegal and, therefore, nonbinding.

Furthermore, the grantor must be legally competent, or of sufficient mental capacity to understand the ramification of the sale, often called sound mind. If a person is mentally impaired, the deed is not automatically void, but rather voidable on its face. However, if a person is determined by a court of law to be incompetent, the deed would be automatically void. A person who has been judged legally incompetent cannot transfer property without the permission of the court.

DEFINITION

A valid contract is one in which all elements are intact and enforceable in a court of law. A void contract is of no legal force because one or more elements are missing from the contract. A voidable contract appears to be valid on the surface, but after inspection, one element is defective. An affidavit of one and the same is a legal contract that declares that a person is the same person using a different name, such as after a marriage, divorce, or legal name change.

The grantor’s legal name must be mentioned and maintained throughout the deed in its entirety. In the case of a name change, either through marriage, divorce, or a legal action, the deed may state both the former and current names, such as “Susan Smith, formerly Susan Jones.” Some states allow for supporting documents, such as marriage certificates or legal divorce decrees, to help identify the person. An acceptable but less-preferred method is for a person to sign an affidavit of one and the same.

The grantee’s name must be specified for a deed to be valid. It must identify the grantee in such a way as to not be questionable, but rather specifically stated. For example, a deed that names “my best friend Kenneth” would be unacceptable; however, one that identifies “Kenneth John Turner” would be acceptable.

If a deed contains more than one grantee, the granting clause specifies how they are taking title to the property, be it as joint tenants or tenants in common.

A valid deed also must include a consideration clause stating the grantor is receiving something of value from the grantee for the transfer of the ownership. Most states require a nominal fee stated within the deed itself, such as “for $10 and other good and valuable consideration.” If the property is being transferred as a gift between family members, “love and affection” may be sufficient as consideration.

The granting clause states the grantor’s specific intention to convey the property to the grantee. Depending on the intention and degree to which he intends to convey the property, the deed uses specific language to identify his intention, such as the following:

“I, [grantor’s name], convey and warrant …”

“I, [grantor’s name], remise, release, and alienate …”

“I, [grantor’s name], grant, bargain, and sale …”

“I, [grantor’s name], remise, release, and quitclaim …”

A conveyance of a deed typically transfers all the rights of the grantor into fee simple unless specified within the deed itself. A deed granting fee simple usually contains the words “to Kenneth John Turner and his heirs or successors”; if the deed conveys less than fee simple, such as a life estate, the wording of the granting clause identifies the intention, like “to Kenneth John Turner for his natural life.”

The habendum clause gives rise to the degree of enjoyment conveyed between the grantor and grantee. “To have to hold” is the common understanding of the habendum clause issued by most grantors. However, the provisions of this clause must run parallel with the granting clause. That is, if the granting clause is conveying less than fee simple, the habendum clause must specify the grantee rights conveyed.

A valid deed must include an accurate legal description of the property being conveyed as well. Most real estate transactions require the full legal description rather than the street address to avoid any confusion during the transfer. In the case of a resale, the county surveyor’s office can help determine the correct legal address. When selling large parcels of farmland or new construction, a property surveyor might be required to determine the accurate legal address.

Should a deed have any exceptions, reservations, or restrictions placed on the property, they must be noted within the deed. In the case of a new build, a builder may have placed some private restrictions in the form of covenants, conditions, and restrictions (CCRs). A private resale of property may allow for the grantor to place other restrictions on the property, such as a fee simple determinable. Along with any other private restrictions, if any, he received when he bought the property, these also must be included in the new deed to the grantee. Some deed restrictions may have expiration terms that need to be renewed if the intention is to keep them in place at the time of the conveyance.

The signature of the grantor or grantors must be in place to create a bona fide deed. In most states, both spouses must sign the deed to convey clear title and release their interest in the property during a sale or transfer of the property. In a case of a corporate deed transfer, a corporate seal may be required to verify the corporation’s agreement of the conveyance.

Some states allow a power of attorney to sign for a grantor. A power of attorney is a person who has been granted legal authority to sign documents, including a deed, for another person. The document granting the power of attorney to the individual may be recorded in the public documents already, or it may be recorded by incorporation into the closing documents collected by the closing company, which then will be subsequently recorded.

An acknowledgment of the deed by a notary public is required at the time of conveyance. The acknowledgment by a notary public is a declaration by a state-authorized person, typically a closing agent, that the person signing the document did so voluntarily. The closing agent, acting as a notary public, also verifies that the person signing the deed is, in fact, the person stated on the deed by a verification of identification.

DEFINITION

An acknowledgment by a notary public is not a legal validation of the document and does not suppose any legal information at all. Rather, an acknowledgment is merely a verification that the people signing the document are, in fact, who they say they are.

The deed is considered to have passed upon delivery by the grantor and accepted by the grantee. The deed may be delivered by the grantor personally or by a third party acting on their behalf, such as a title company during an insured closing. The effective date of conveyance is considered the date the deed was accepted by the grantee. A deed also may be considered accepted on the date of entering it into the public record with the county recorder.

Types of Deeds

The clear majority of real estate transactions use one of four major types of deeds to convey title, although less common types are also sometimes used. The difference in types of deeds is primarily the covenants and warranties conveyed by the grantor to the grantee. These vary from significant warranties to no warranties at all conveyed with the property. The type of deed used to convey the property can vary, but it must run parallel with the granting clause’s intention of conveyance.

Deeds can be very short in length—under a page—or they can be several pages long with many restrictions, covenants, and special granting clauses. In a residential transaction, the deed is normally prepared by an attorney.

Common deeds used in real estate include general warranty deeds, special warranty deeds, bargain and sale deeds, quitclaim deeds, deeds of trust, trustee’s deeds, reconveyance deeds, and deeds executed pursuant to a court order.

The general warranty deed, sometimes called just warranty deed, is by far the most common deed used to convey property from the grantor to the grantee. The general warranty deed affords the most protection to the buyer due to the covenants, promises, and warrantees given by the seller. The general warranty deed is the assumed method of conveyance when the granting clause states, “I, [grantor’s name], convey and warrant ….” Contained within the general warranty deed are specific warranties that may vary by state, but basically state the following:

Covenant of seisin  The grantor warrants that they own the property and have the legal right to convey it.

HELPFUL HINT

Seisin, from the feudal system, means “possession.”

Covenant against encumbrances  The grantor warrants that the property is free of any liens or encumbrances unless they’re specifically stated in the deed.

Covenant of quiet enjoyment  The grantee is guaranteed that the title will be good against third parties attempting to establish title to the property.

Covenant of further assurance  The grantor promises to make the title good and will deliver any document or instrument necessary.

Covenant of warranty forever  The grantor promises these warranties to never expire and compensates the grantee for any losses sustained in the future.

The covenants or warranties in a general warranty deed do not cover just the period of ownership of this grantor; they extend back to the origin of the property. Each grantor of a general warranty deed will defend the title against any defects created by the grantor as well as those previously holding title to the property.

In a special warranty deed, the seller’s guarantee does not cover the property’s entire history. Generally, the seller only guarantees against problems or claims created during the seller’s ownership of the property. A special warranty deed often is used with property seized in a foreclosure situation, where the history prior to the current owner is unsure or questionable. The special warranty deed is the assumed method of conveyance when the granting clause states, “I, [grantor’s name], remise, release, and alienate ….”

The general warranty deed conveys five covenants, or warranties, but the special warrant deed only conveys two such covenants:

  • The grantor has received the title.
  • During the ownership of the grantor, they did not allow the property to become encumbered, except as otherwise noted specifically within the deed.

The grantor of the special warranty deed, in effect, only warrants the title against their own actions or omissions. They warrant nothing prior to their taking title. This makes the special warranty deed very useful in cases where a fiduciary, such as a trustee or executor of a will, has no intimate knowledge of the prior owners’ actions and lacks the authority to warrant against any such actions.

A bargain and sale deed, used in residential real estate or sales of court-seized properties, conveys ownership of a property from the seller to the buyer. It generally does not guarantee, but rather implies, to the buyer that the seller owns the property free and clear. A bargain and sale deed resembles a quitclaim deed, but the property is sold rather than relinquished. The bargain and sale deed is the assumed method of conveyance when the granting clause states, “I, [grantor’s name], grant, bargain, and sale ….”

It’s permissible to add covenants or warranties to a bargain and sale deed. A covenant against encumbrances could be incorporated within the bargain and sale deed as well, creating a bargain and sale with covenants against encumbrances. This addition would make the deed appear very much like a special warranty deed.

A quitclaim deed is used to transfer an interest, whatever that interest may be, in real property from one individual to another. This type of deed distinguishes itself from all other deeds in that it does not give any covenants, warranties, guarantees, or assurances with the transfer of ownership to the new owner. A quitclaim deed is the assumed method of conveyance when the granting clause states, “I, [grantor’s name], remise, release, and quitclaim ….”

A quitclaim deed can convey good title as well as the general warranty deed, apart from any of the covenants that come with the general warranty deed, as long as the grantor holds good title at the time of the issuance of the quitclaim deed.

Often there are instances when a quick transfer of property is needed without the assurances other deeds like the warranty or special warranty deeds give to the new owner. When property is transferred to an ex-spouse as part of a divorce settlement, for instance, a quitclaim deed is used. It also can be useful when adding a new spouse to the title after marriage. Parents often use it to deed a house to their children, and estate planners use it to transfer property into a trust or to an heir.

During regular real estate transactions, quitclaim deeds are quick fixes to cure a cloud on the title.

DEFINITION

A cloud on the title refers to any mistakes, misspellings, or irregularities in the chain of title that would give a reasonable person pause before accepting title. A cloud on the title reduces the value of a property because any prospective buyer knows they are buying the risk the grantor may not be able to convey good title.

A deed of trust, sometimes called a deed in trust, is used to transfer property from the trustor into a trust controlled by a trustee for the benefit of the beneficiary.

A reconveyance deed is used by a trustee to return the property to the original trustor. In states that use the deed of trust theory to take ownership of property, a reconveyance deed is used to transfer the property to the trustor when the last payment is made to satisfy the outstanding loan on the property.

A trustee’s deed is a deed executed by the trustee to convey the property to any person other than the trustor. The trustee’s deed must include a statement that his actions are authorized under the guidance of the trust.

A deed executed pursuant to a court order is a deed that’s conveyed by order of a court and established by state statute. The most common is a family court, in the case of a divorce decree. It also may be used by executors or administrators of a will.

One unique feature of a deed executed pursuant to a court order is that within the consideration clause of the deed, the full consideration price of the property is listed. Instead of “… for $10 and other good and valuable consideration,” it states the actual sales price, such as “… for $105,000 and other good and valuable consideration.”

Transfer Tax and Calculations

In some states, the sale of nonexempt real property may be subject to a transfer tax, or a grantor’s tax. Real estate transfer tax is an excise tax on transactions involving the sale of real property where title to the property is transferred from the seller to the buyer.

A transfer tax is typically paid by the seller; however, it can be paid for by the buyer or even split between the two parties based on local customs or agreed upon contractually. Some states require that the tax be paid in advance and a stamp be placed on the deed to make it eligible to be recorded; other states collect the tax at the time of recording at the recorder’s office.

HELPFUL HINT

Only a few states use the transfer tax on the sale of real property. Check with your state real estate commission to verify if your state uses the tax, and the applicable rate.

States that require transfer tax stamps also mandate a transfer declaration form, or affidavit of real property value, which must be signed by both the seller and buyer and their agents to testify to the actual sales price.

The actual tax rate imposed varies and may be imposed at the state, county, or local level. For example, the transfer tax on a sale of real property is $1 for every $1,000, or any fractional part thereof. If the property sold for $150,500, the transfer tax would be $151:

$150,500 ÷ $1,000 = $150.5

However, the “or any fractional part thereof” phrase in the example means there are 151 units within the sale price because there are 0.5 parts it would treat as a single unit. So the transfer tax is $1/unit, or $151 tax.

Some properties may be exempt from transfer tax stamps, such as deeds between certain family members, deeds by government entities, deeds of foreclosure and deeds in lieu of foreclosure, deeds of partition, deeds pursuant to mergers or consolidations of corporations, deeds by a subsidiary corporation or parent corporation, deeds executed by public officials, deeds into or out of trusts, and deeds to charitable conservation organizations or religious institutions.

Closing the Transaction

The culmination of the activities involved in a real estate transaction is the closing, sometimes called the settlement or exchange. The buyer completes the financing arrangements for the mortgage and note, while the seller transfers over title of the property to the buyer. Per the sales contract, both sides of the transaction have promises, or terms, to uphold to the other party for the closing to be a success.

Typically, the closing is held at a title company agreed upon by the buyer and seller within the sales contract. The parties in attendance to the closing are the buyer or buyers, the seller or sellers, agents for both parties, the closing agent, and sometimes also a lender. In some states, an attorney may accompany the buyer or seller to a closing.

Prior to the closing, the buyer and his agent perform a final walk-through of the property to ensure the property he made an offer on, and accepted, is still in the same condition. Typically, he checks that all agreed-upon personal property was left or taken, based on the negotiated sales contract; all the repairs have been made; and the property has been well maintained since the inception of the sales contract.

During the closing, the buyer may seek several documents to ensure the seller can deliver marketable title, the title is free and clear of any liens, and the title can be transferred with no issues. These might include the deed; the title insurance policy; the mortgage and loan documents, if any; a copy of the appraisal; any documents or receipts clearing the liens; any lease agreements, if it’s a rental property; or a survey of the property.

The seller’s primary role in a closing is to maintain contact with his agent for closing instructions. The title company performs a title search on the property to determine if any outstanding liens and encumbrances exist. It’s the job of the seller to remove the liens or provide proof if the lien has been paid in full. The seller may be asked to sign an affidavit of title, or seller’s affidavit to certify the seller has not encumbered the property, become involved in a lawsuit, or placed a lien on the property since the original title work was searched upon listing the property. Furthermore, the title company seeks a mortgage payoff statement, also called a mortgage reduction certificate, from the seller’s mortgage company stating the exact payoff amount as of a certain date.

The closing agent or officer is a representative for the title company and guides the buyer and seller through the actual closing process. Most closing agents are also notary publics and can notarize documents for recording as the buyer and seller are signing them during the closing process.

The broker’s role at closing is to aid his or her client should they need any last-minute help, advice, or insight at the closing table. Some states operate under the minimum level of services act that requires a broker to attend closing with their client, among other responsibilities.

In some cases, a lender may attend the closing as well to ensure their company’s interest is well taken care of during the closing. Much like the buyer, the lender seeks the same documents to protect their asset being collateralized for the loan. The lender might request additional requirements, like home hazard insurance policy; home inspection; reserve or impound accounts for real estate taxes, insurance, and flood insurance; and PMI insurance policy, if any. The lender also might seek a certificate of occupancy if the property is a new construction.

DEFINITION

A certificate of occupancy is evidence that the building or residence complies substantially with the plans and specifications that have been submitted to, and approved by, the local authority.

Face-to-Face Closings

The face-to-face closing is a scheduled event, with a specific date, time, and location agreed upon by both parties. It’s usually held at the title company’s office, an attorney’s office, or a real estate brokerage office. New mobile closings are becoming more in-demand as people’s schedules become more hectic.

DEFINITION

A mobile closing is one that takes place outside regularly accepted locations or timeframes by allowing a closing agent to travel and meet with the buyer and seller in a remote location. I have heard of closings happening in hospital rooms, backyard picnic tables, and even jail cells.

During a face-to-face closing, the closing agent works for both parties as a disinterested third party to ensure all documents are properly executed, funds are collected, and copies of all paperwork are served to both parties.

When the everyone is confident the paperwork is in order and properly signed, the exchange is made. The seller signs the deed and delivers it to the buyer. The buyer provides the monies required in the form of a loan and possibly earnest money, if any was deposited upon the acceptance of the offer. The title company then has all the documents properly recorded. Due to the priority of liens, proper care is taken to ensure the seller’s lien is removed first via the payoff. The deed is then recorded, followed by the buyer’s mortgage and loan documents. The deed must be recorded first, due to the fact the buyer cannot mortgage a property he doesn’t own.

DEFINITION

A priority of liens is a theory that states that liens gain priority, or preference, based on the order they are recorded. The first lien recorded gets primary position, hence the name primary lien.

Escrow Closings

An escrow closing, sometimes called a non-face-to-face closing, can be used whenever the buyer and seller cannot physically be together in the same location, either due to geographical or time-related constraints. Should this occur, an agreed-upon escrow agent, or an escrow holder, can be used to close the property in escrow. Most often, the title company serves as the agent for the escrow closing; however, attorneys, certified public accountants, trust companies, or special companies established just to be escrow agents could be used as well.

In an escrow closing, one party attends the closing and executes their portion of the required documentation. If the reason for the escrow is due to a time issue and both parties can be present at one location but not at the same time, the escrow process is a bit easier and quicker to accomplish. If the seller attends first, he signs the deed. Remember, the property only passes hands when the deed is delivered and accepted by the buyer. So if the seller leaves the signed deed in escrow with the agent, the deed has not passed yet. The seller’s agent also leaves the earnest money, if any, collected from the buyer with the escrow agent.

The escrow agent collects all the paperwork, seals it in a file, and places all the documents in a safe, usually within the office.

The buyer attends his portion of the escrow closing, and the escrow agent guides him through his portion of the paperwork. Once complete, the escrow agent collects the buyer’s paperwork and adds it to the seller’s paperwork for recording. Copies are made and handed to the buyer. At this time, the deed is delivered and accepted by the buyer from the escrow agent. The escrow agent then calls the first broker and apprises him of the completed transaction. Sometime later, he returns with his seller client to get their paperwork and closing proceeds from the sale of the property.

If the escrow closing is due to geographical reasons, such as a bank-owned property closing, the escrow agent overnights the seller’s portion of the documents to the bank. It then executes the paperwork under the supervision of its notary to verify the authenticity of signatures. It then returns the executed documents to the escrow company for final signatures by the buyer.

In today’s ever-more-technological world, expect to see eclosings soon, which will eliminate the need for escrow closings. Both parties will be able to join a website and close the property via electronic signature and wire transfers.

The Least You Need to Know

  • A title serves as evidence of ownership and as evidence that you have the right to sell.
  • A deed is the physical document used to transfer title from one person to another.
  • A deed is a legal contract and must fulfill all contract requirements.
  • Most real estate transactions can be completed with one of four types of deeds: warranty, special warranty, bargain and sale, or quitclaim deeds.
  • Some states use a transfer tax on the sale of real property.
  • The closing is the culmination of an agreed-upon sales contract and can happen face-to- face or as escrow.