Monday, August 31, 2020

What is a special warranty deed? | Affiliated Mortgage

What is a special warranty deed?

Deeds are a critical concept in real estate and are essential for transferring ownership of the real estate. A deed is a legal description that transfers the ownership of one party to another. However, few homeowners or prospective buyers realize that there are numerous types of deeds. 

Different types of deeds have key distinctions that you must know. For example, what is a special warranty deed? A special warranty deed provides limited guarantees and may be referred to as a limited warranty deed. In this post, we will dive deeper into the concept of a special warranty deed and its importance. 

Warranty Deed Definition 

To transfer the ownership or title of a real estate property, you need a warranty deed. The warranty deed includes some guarantees from the seller, like that the property title in question is clear. A free-and-clear title has no liens, outstanding mortgages, ownership claims, or other issues that would impede its transfer. 

Special Warranty Deed Definition 

One type of warranty deed is the special warranty deed. The special warranty deed only guarantees that the seller received the title and did not face encumberment during his or her specific period of ownership. Essentially, the special warranty deed only guarantees the title during that owner’s time with the property. In essence, the seller assures you that he or she did not take any actions (or fail to take actions) that would impact the title.

Basically, the special warranty deed guarantees the title was not affected during that seller’s period of ownership. It does not warrant anything that could have occurred before he acquired the property. 

What is a limited warranty deed?

When you ask “what is a special warranty deed?” and “what is a limited warranty deed?” you are asking the same question. A limited warranty deed is just another name for a special warranty deed. The term “limited warranty deed” is perhaps more descriptive of the actual deed, because a limited warranty deed does not contain the full scope of warranty as a general warranty indeed. While the limited warranty deed ensures the buyer that there are no title defects during the time the grantor owned the property, it does not provide an assurance for the condition of the title prior to the time the grantor took ownership of the property. 

Special warranty deed vs general warranty deed

There are some deeds that do not include any guarantees, which can be very scary for buyers. The special warranty deed at least includes some guarantees, which does offer some protection. However, the special warranty deed is an alteration of the general warranty deed. Just because it has the word “special” in it does not mean that is is better. 

With a general warranty deed, the grantor offers an overall guarantee. This means the seller warrants that there are no encumbrances at all against the property, not during his ownership or prior. The general warranty deed signifies that the title was clear at the time of the previous seller’s purchase, and now. 

On the other hand, the special warranty deed only promises that the property was free and clear during the period of time that the seller owned it. The special warranty deed is not limited to just those two guarantees. 

Both types of deeds offer some guarantees to the buyer including:

  • The seller currently owns the title. 
  • The seller is legally able to sell the property and transfer the title. 
  • The property is still available, it has not already been sold. 
  • The property is free of claims or debt. 
  • The seller is fully responsible for undisclosed faults with the property. 

Benefits of Special Purpose Deeds

If a special warranty or limited warranty deeds have fewer guarantees than a general warranty deed, why would anyone want to use them? Of course, there are some benefits to special warranty deeds. For one, special warranty deeds still facilitate the transfer of the property title between the seller and the buyer. Additionally, if title insurance is purchased, then the insurance will mitigate the risk of claims prior to the special warranty deed. This means the buyer can still gain key protection through title insurance. 

Drawbacks of Limited Warranty Deeds

As you might imagine, there are some clear drawbacks to the special warranty deed. For the buyer, the risk is obvious. The special warranty deed offers narrow protection or guarantees for the buyer compared to a general warranty deed. Because of this, the buyer may assume more risk when purchasing a property with a special warranty deed. The main con is that special warranty deeds only cover the period of ownership of the seller, they do not guarantee the history of the property. This is risky and concerning for the buyer in many cases. 

What is a special warranty deed in real estate and when is it used?

Since special warranty deeds do not promise the overall condition of the title, they are rarely used in residential real estate between buyers and sellers. Many buyers are hesitant to engage with special warranty deeds, for clear reasons. A buyer that is purchasing a new home for their family would like assurance that the title is free of liens and claims in its entire history. 

However, there are cases where limited warranty deeds are quite common. For example, special warranty deeds are often used in the case of bank foreclosures. When the previous owner fails to pay his or her mortgage, the bank will reclaim the property and eventually sell it at auction. Buyers get incredible deals on foreclosures and the bank is able to quickly get rid of the property. In the case of the foreclosures, the buyer gets a limited warranty deed. The bank only promises that no claims were placed on the title when it owned it. Unfortunately, the buyer will not receive any guarantees about the title’s condition before the bank owned it. Luckily, the buyer can purchase title insurance for protection in the event that claims do arise. 

In some estate situations, the buyer may accept a special warranty deed if they already know more about the property’s history. Often, the person receiving the property feels comfortable that they know the property’s history more in-depth. Since the executor of the estate or the trustee is transferring the estate, they cannot be held liable for faults in the title because they did not personally own the property. 

An Example of a Special Warranty Deed

For clear reasons, the general warranty deed is more common when it comes to residential real estate purchases. However, imagine that the seller wants to offer the property with a special warranty deed. During that owner’s time, they did not miss any payments or have any liens put on the title. 

So, let’s say you purchase the home with the special warranty deed and do not have any title insurance. The catch is that the owner prior to the one you bought from failed to pay her property taxes for several years. Eventually, the county can perfect a lien against the property for the taxes that are due. The seller you bought from would not have to inform you of this even if they knew because the special warranty deed does not include encumbrances beyond the scope of that seller’s ownership. 

That means that those unpaid taxes can become your responsibility when you take over the property! You agreed to buy the property as-is and incur any liens or underlying debt as long as it wasn’t from the time the person selling owned the property. While most sellers will not do this on purpose, the end result is that you could face financial penalties that you were not prepared from. This makes sense in the case of foreclosures, but you can see the real-life downfalls of a special warranty deed. 

Can I convert a limited warranty deed?

Many buyers wonder if they will ever be able to convert a special warranty deed into a general warranty deed. However, you cannot “convert” the deed the grantor provides to you. If you eventually decide to sell the property, you can determine which type of deed to offer your buyer, but you should know that you will be held responsible for incorrect guarantees. If you offer a general warranty deed but there turns out to be title claims on the title from before you owned the property. 

What is title insurance?

Title insurance is an excellent way to help protect you and your new property from former problems with the title. When you purchase title insurance, the title company searches your title records in detail. If they unveil ownership issues, then they may help you remedy title problems. 

The title insurance company first searches public records to assess ownership status. Then, the underwriter determines the ability to ensure the title. Even highly educated and experienced professionals can miss some risks like undisclosed heirs, filing errors, or forgeries. After the title company concludes its search, they will provide you with title insurance that helps protect you from a myriad of issues that can be uncovered later. 

Title Insurance for Special Warranty Deed

Regardless of the kind of deed you get, title insurance is key. In the case of special warranty deeds, title insurance is absolutely essential and will help you protect your property. Title insurance will help protect you from financial loss if pending defects on the title arise. For special warranty deeds in particular, because it will mitigate some of the risks associated with special warranty deeds. 

In general, it is best to avoid special warranty deeds if you are unfamiliar with the seller and property. In some cases, special warranty deeds are unavoidable for the property. That is why title insurance is so important for special warranty deeds. 

Understanding different types of deeds are incredibly important and helpful in the home buying process. In most cases, it is optimal to seek out general warranty deeds, but special warranty deeds are common related to foreclosure. For more information on types of deeds and other key aspects of the home buying process, check out our blog or contact our knowledgeable team here

Contact us at (605) 718-9820 or schedule a call and let our mortgage experts help you with your home loan.


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