Transcript:
Hey there, it’s Casey Denman with TaxSaleAcademy.com. Thanks so much for joining me for out weekly tip segment. This week’s tip comes as the result of a question I received via email. I responded to that question privately, but I also wanted to shoot a video because deeds are often very misunderstood.

I want to discuss the proper time to utilize a warranty deed over a quit claim deed. Many new investors want to use warranty deeds because of the potential to sell the property at a higher price. The buyer will simply pay more for you to write a warranty deed instead of a Quit Claim Deed. For you, it’s just a piece of paper perhaps. Unfortunately, using a warranty deed without regard to a number of other things, you are putting yourself into a huge potential nightmare.

Now, before we get into it I want you to understand that this is MY take. If you want to operate your business differently that’s fine. But I wanted to provide my opinion on this topic as someone who’s seen quite a bit in his almost 20 years of investing in this business.

So, when you look at a warranty deed or some sort of similar deed it’s not just the title of the document we are looking at. You should be studying the language of that deed. That deed doesn’t just serve to transfer the property from one person to the next, but it’s also a contract.
There is language of some sort guaranteeing that the property is completely free and clear of all liens and encumbrances.

I’ll throw up a clause out of one of my recent warranty deeds. You can see it says….the “grantor fully warrants the title and will defend the same . . .that it’s free of all encumbrances”. Encumrbance, by the way includes any limitation that can restrict the owners ability to transfer title OR something in the chain of title that serves to lessen its value. That’s pretty vague and you, the seller and fully warranting that there are no encumbrances.

So with a warranty deed, you are providing a warranty that the chain of title is how you say it is in the deed that you’re signing. And THAT, that is how you can get yourself into big trouble.

Now, in a conventional real estate transaction when you sell you are typically going to provide some sort of warranty. It’s what is expected on the open market. That warranty, however, is going to be paired with a title insurance policy. What happens is the title insurance company will search the chain of title, and then after their professional searches deem that everything is clear they will issue title insurance against the property for the transaction. If there is ever an issue in the future, like clouds, liens, outstanding mortgages, previous deed issues, that kind of stuff, then the title insurance policy kicks in and covers everything and essentially backs the warranty you provided when you signed that warranty deed. Very similar to car or health insurance. If there is an issue, the insurance covers it.

But, here’s the problem. With tax defaulted real estate and certain other types of transactions you aren’t able to get title insurance without first curing the title. I’ve got other videos on that, but in short, no title insurance. Now, when you DO NOT have a title insurance policy attached to the property, but you do still sell with a warranty deed, there is no title insurance to cover potential issues. So, who covers them? The person who signed that warranty, as part of that warranty deed does! That’s you!

So, even though you sold that property ten or twenty years ago, when your buyer finds out that there is an issue with the title they will come to you. And not just title clouds from a tax foreclosure, but things like a 30 or 40 year old lien that was never satisfied correctly which happens more than you might expect. So, you are then required to clear any issues with the chain of title to satisfy the warranty you provided.

And here’s where it can become pretty sketchy. If you’re under the impression that you’re selling cheap land or whatever so you don’t need title insurance but you want to use a warranty deed regardless to get a few extra bucks, please understand that it’s not about the value of the land. In that warranty deed, the langaugae that you agreed to by signing it does NOT say you will warranty the chain of title up to your sales price. It simply says you will warranty the title.

So, when your buyer or potentially other buyers into the future further down the chain of title have an issue, they’ll come after you. That $1,000 lot that you warrantied but has a $40,000 lien from 20 years ago from whomever is now your responsibility. And not only that, if you fail to cure the title like you promised, you could end up in a lawsuit forcing you to. So now you have court costs, attorney’s, both your attorney and their attorney, plus the cost to cure the title.

Now, obviously, when you use a warranty deed without title insurance you’re not always going to end up in court. More often than not, you won’t. But, be aware that by doing this routinely you are absolutely playing with fire.

Instead, cure the title and sell the property through a warranty deed with title insurance OR just use a Quit Claim Deed where you are not providing a warranty and then let the buyer handle it in the future.

I truly hope that this video helps you out. Listen, I just don’t want any of my viewers to put themselves into financial because they weren’t sure of what deed to use or because they were trying to get a few extra bucks. There’s quite a bit to this business and and I really hope that this is one of those videos that help you understand that.

If I can help in any way, there are a whole bunch of links in today’s show notes for you including one to our primary site at TaxSaleAcademy.com where you can join our academy for the most advanced step by step training we offer.

Thanks so much for listening and make it a successful day.