It has been almost four years since I have discussed deeds in any detail in this column. If you own your own home you have probably seen a deed. It’s only one page long. It’s pretty simple – NOT!
It may look easy to draft a deed, but it is even easier to mess it up. The words used on a deed can make a huge difference on how real estate is going to be treated for transfer of ownership, probate or title purposes. I regularly see deeds that do not operate as intended.
You may be tempted to draft your own deed because you found the form online or at the stationary store. These do-it-yourself deeds are the ones for which, after a death, the survivors come to me to “fix”. It’s almost always more costly to repair a bad deed, if it can be fixed, than it would have been to pay to have it done right in the first place. It’s like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.”
Before you attempt to draft your own deed in order to save a few hundred bucks, it might not be a bad idea to learn a little bit about them. Any discussion about deeds must include a discussion about the different types of deeds, the general elements of a deed, different types of ownership interests and, if you have more than one owner on the deed, a description of the rights of each of those owners. Today’s column will focus upon different types of deeds.
The three most common types of deeds that I have seen used in Michigan are warranty deeds, quit claim deeds and covenant deeds. Each of these types of deeds conveys different interests in the real estate. Warranty deeds offer the most protection for buyers, quit claim deeds the least protection, and covenant deeds, somewhere in the middle, depending upon the language used.
Warranty Deeds
If you have ever purchased a home, you typically would have received a warranty deed, especially if you took out a mortgage. The seller named in the deed, called a transferor or grantor, transfers or conveys an ownership interest in the real estate to the buyer, called a transferee or grantee. The grantor in a warranty deed also guarantees or warrants that he or she has good title to the property and is transferring or conveying that good title to the grantee. Some lenders do not loan money secured by a mortgage on real estate unless the buyer received clear title to the property by warranty deed.
A transfer-on-death deed, also called a Ladybird deed, is a type of warranty deed that only takes effect after the death of the grantor. If you are purchasing property, you would want a warranty deed if at all possible, since it provides the most protection for you as the buyer.
Quit Claim Deed
Another common type of deed is the quit claim deed. A quit claim deed is sometimes improperly referred to as a “quick” claim deed. When you transfer property by quit claim deed, you are only transferring any interest that you have in the property. You do not guarantee or warrant that you own the property or have clear title. When you receive property by quit claim deed, there is generally no assurance that you are getting anything. You are only getting what the grantor has.
Arguably, anybody can give a quit claim deed to anyone for any real estate. All you are saying to the grantee is, “I am giving you what I have, and that can be nothing.” There is no warranty of title and that could be a problem, especially when you quit claim deed to family members.
When you originally purchased your home, especially within the last 30 years, you probably received a warranty deed and title insurance from the seller. You may have since transferred your home to your children by quit claim deed. If there is a problem or a defect on the title at a later date, your children may not have any claim against your title insurance, since they have no claim against you.
However, if you transferred the property to your children by warranty deed, they would have a claim against you for any defect in the title existing at the time of transfer, such as a lien or other interest of a third party. If you can show that the defect was also present when you originally purchased the property and received your title insurance, they may be able to make a claim against your title insurance to clear up that defect.
Because of this potential loss of title insurance coverage, I rarely use quit claim deeds anymore. In most instances, I use a warranty deed, especially when I draft a deed which is transferring property to the owner’s revocable living trust or to family members. About the only time I use a quit claim deed nowadays is when there is going to be a transfer of a partial interest in the real estate such as mineral interests, easements and land contract seller’s or purchaser’s interests.
Covenant Deed
The last type of deed that I see on a regular basis is a covenant deed. With a covenant deed, the grantor gives a limited warranty or covenant. The typical limited warranty or covenant given in a covenant deed is that the grantor has not done anything to impair the title to the property since acquiring it.
A fiduciary deed is typically a type of covenant deed given by a personal representative of an estate or a trustee of a trust. These financial representatives are called fiduciaries, hence the name fiduciary deed.
The grantor of a covenant deed typically has acquired the property by operation of law, such as by foreclosure, as successor trustee of a trust or as personal representative of an estate. Because of this and the limited warranty, when you are receiving an interest in real estate with a covenant deed, it is especially important that you obtain title insurance to protect your interest.
As you can see, small words such as “convey”, “warrant” or “quit claim” can make a huge difference in the interest you are receiving in the real estate. A good real estate attorney should be able to assist you to make sure your interests are protected.
By Matthew M. Wallace, CPA, JD
Published edited December 25, 2016 in The Times Herald newspaper Port Huron, Michigan as: Different types of deeds and what they do