Special Warranty Deeds Explained: What They Are, How They Work, and Examples
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Summary:
Discover the intricacies of special warranty deeds in real estate transactions. This comprehensive guide explains what special warranty deeds are, how they work, their key features, and their significance in property transfers. Uncover the similarities and differences between special and general warranty deeds and gain insights into when and how to use them. Explore real-life examples, considerations, and the importance of title insurance in safeguarding property transactions.
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Understanding special warranty deeds
In the realm of real estate transactions, the type of deed used can significantly impact both buyers and sellers. One such deed that plays a crucial role in property transfers is the special warranty deed. Let’s take a comprehensive look at what a special warranty deed is, how it works, its key features, and when it’s most commonly employed.
What is a special warranty deed?
A special warranty deed is a legally binding document used in real estate transactions to transfer property ownership from the seller, known as the grantor, to the buyer, or grantee. What sets it apart from other types of deeds, particularly the more common general warranty deed, is the scope of the warranty provided.
With a special warranty deed, the grantor warrants that they only guarantee against issues or encumbrances in the property title that occurred during their ownership. In other words, they are taking responsibility for any problems that arose during the time they held the property title. This limited warranty is in contrast to a general warranty deed, which offers comprehensive protection against any defects or encumbrances in the property’s entire history, even before the grantor’s ownership.
Key features of a special warranty deed
Before we delve further, it’s essential to understand the key features of a special warranty deed:
- Limited warranty: A special warranty deed offers protection only for the duration of the grantor’s ownership.
- Ownership assurance: The grantor guarantees that they own the property and can legally sell it.
- No pre-existing issues: It does not protect against any title issues that existed before the grantor’s possession of the property.
How a special warranty deed works
Special warranty deeds find their primary use in commercial property transactions, while residential property transactions generally involve general warranty deeds. The critical distinction lies in the extent of protection they provide to the title’s ownership.
When a property is conveyed using a special warranty deed, it means that the seller (grantor) is only taking responsibility for issues they may have caused during their ownership. Any problems stemming from previous owners’ actions become the responsibility of the new owner (grantee).
Let’s consider an example to illustrate this concept. You decide to purchase a property that had two previous owners. The first owner neglected the property, resulting in fines imposed by the city’s code enforcement department. These fines were attached to the property as liens. When the first owner fell behind on their mortgage, the property went into foreclosure and was sold to the second owner.
Now, you come into the picture and acquire the property using a special warranty deed from the second owner. A few years down the line, you decide to sell the property. However, the code enforcement liens from the first owner’s time still exist, potentially encumbering your sale. At the very least, you’ll need to address and clear these liens to ensure a clean title for the new buyer.
Similarities between general and special warranty deeds
While general and special warranty deeds differ significantly in terms of the protection they offer, they also share several common elements:
- Identification of parties: Both types of deeds identify the seller (grantor) and the buyer (grantee).
- Property details: They specify the physical location and description of the property being transferred.
- Debt and encumbrance assurance: Both deeds assure that the property is free of debts or encumbrances other than those explicitly noted in the deed.
- Ownership and title: The grantor warrants that they have legal ownership of the property and have the right to transfer the title.
- Clear title guarantee: There is a guarantee that the property’s title would withstand any third-party claims to ownership.
Example of special warranty deed
While general warranty deeds are the standard in residential real estate transactions, there are scenarios where special warranty deeds take center stage. One such scenario involves foreclosed properties, real-estate-owned (REO) properties, or short sales.
Entities like the Federal National Mortgage Association (FNMA), Housing and Urban Development (HUD), and banks often utilize special warranty deeds when selling properties they’ve acquired due to defaults or foreclosure. Why do they prefer special warranty deeds in these situations? The primary reason is to limit their liability for any issues related to the property that may have existed before they took possession.
Here’s a real-life example: In 2012, a couple in Grenada County, Mississippi, defaulted on their property’s loan payments. As a result, their lender, Wells Fargo Bank, foreclosed on the property in February 2013. Subsequent legal documents indicated that Wells Fargo “conveyed the Property to FNMA in a special warranty deed.”
Special considerations
While a title search is a standard practice in real estate transactions to uncover any liens or claims to a property’s title, it’s important to acknowledge that no search is foolproof. A title search involves a comprehensive review of available public records to determine property ownership. However, there’s always the possibility that something could be missed.
For this reason, most buyers, irrespective of the type of warranty deed used, opt to purchase title insurance when acquiring a property. Title insurance serves as an indemnity policy, safeguarding the buyer against financial claims or issues related to the property’s title. It provides an added layer of protection, ensuring that buyers have peace of mind when completing their real estate transactions.
Conclusion
Special warranty deeds serve a specific purpose in the realm of real estate transactions, offering a level of protection while limiting the grantor’s liability to their ownership period. Understanding the nuances of these deeds is essential for both buyers and sellers to make informed decisions when transferring property ownership. While special warranty deeds are more common in commercial property deals, residential buyers should remain vigilant and consider additional safeguards, such as title insurance, to protect their investments.
Frequently asked questions
Can special warranty deeds be used for residential properties?
No, special warranty deeds are more commonly employed in commercial property transactions. Residential property transactions typically involve general warranty deeds, providing greater protection to buyers.
How can buyers protect themselves when using a special warranty deed?
Buyers can take steps to safeguard their interests. Conducting thorough due diligence, including title searches, and purchasing title insurance can mitigate potential risks associated with a special warranty deed.
Do special warranty deeds protect against pre-existing title issues?
No, special warranty deeds solely cover issues that occurred during the grantor’s ownership period. Any pre-existing title problems become the responsibility of the buyer.
What happens if a title issue arises after using a special warranty deed?
If a title issue surfaces after the property transfer, the responsibility for addressing and resolving the issue typically falls on the buyer (grantee). It’s crucial for buyers to be aware of any potential problems before completing the transaction.
Key takeaways
- A special warranty deed is a legally binding document used in real estate transactions that provides limited protection to the buyer, covering only issues that occurred during the grantor’s ownership.
- Key features of a special warranty deed include a limited warranty, ownership assurance, and the exclusion of pre-existing title issues from protection.
- Special warranty deeds are commonly used in commercial property transactions, while residential properties often involve general warranty deeds for more comprehensive protection.
- Buyers can protect themselves by conducting due diligence, including title searches, and considering the purchase of title insurance.
- Special warranty deeds are preferred by entities handling foreclosed or distressed properties to limit their liability for pre-existing issues.
- Title insurance provides an additional layer of protection for buyers in case title issues arise after the property transfer.
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