General vs. Special Warranty Deed: Avoid Unpleasant Surprises
Any seasoned real estate professional knows that there are several commonly accepted means by which property can be transferred between buyers and sellers. Depending on the nature of the sale and the identity of the parties to the transaction, different means of transfer may be used in superficially similar situations. In other cases, the correct means of transfer is liable to be far more obvious.
Unfortunately, those who lack significant amounts of real estate experience may be unsure about the proper uses of general and special warranty deeds. Contrary to popular belief, these two types of title deeds come with several subtle differences. These differences make them suitable for different types of transactions between different interested parties.
General Warranty Deeds Explained
A general warranty deed is the "standard" means by which real property is transferred in the United States. True to its name, it provides the buyer with a warranty that the title to the property in question is free from encumbrances and won't be the subject of any "pending" legal actions or title issues. In other words, a general warranty confers full rights of ownership and disposal to the buyer. Buyers who wish to ensure that they won't face title challenges may check to ensure that the property in question features an "unbroken chain" of general warranty deeds that stretches far back in time.
Special Warranty Deeds Explained
A special warranty deed provides assurance that the property's seller owns the property in question and has not faced any title issues during the course of his or her ownership. In essence, a special warranty deed guarantees that the buyer won't face legal action or title issues as a result of the actions of the property's previous owner. However, it doesn't offer any guarantees that prior owners owned the property free and clear. As such, a special warranty deed can't be used as a link in the so-called "unbroken chain" of ownership that general warranty deeds may create.
Key Points of Difference
Since special warranty deeds only provide "free and clear" guarantees for the duration of the property seller's tenure, they're not "ironclad". As such, they're generally used by commercial buyers and sellers. Alternatively, special warranty deeds may be used in transactions that occur between two property owners who have prior professional or personal relationships.
However, it's important to note that general warranty deeds and special warranty deeds both offer stronger title protections than quitclaim deeds. Most real estate professionals advise buyers to avoid quitclaim transactions during the normal course of business. These deeds may be used to facilitate the gifting of real property between friends, family members or business partners. Quitclaim deeds may also be used to transfer real property between an individual and a business entity. In many cases, such transfers occur between the "seller's" individual account and his or her limited-liability entity or sole proprietorship.
Title Insurance and Final Thoughts
While general warranty deeds and special warranty deeds are generally deemed to provide adequate protections for buyers and sellers, it's never a bad idea for users of either deed to obtain title insurance. In fact, lenders generally require buyers to obtain title insurance during the course of U.S.-based real estate transactions that involve the issuance of a primary or secondary mortgage.
Since title insurance is designed to protect against financial loss in the event of "pending" title issues or other defects with previous ownership arrangements, it may be especially useful for buyers who receive special warranties. As always, inexperienced retail and commercial buyers are advised to obtain guidance from a real estate lawyer before entering into a binding agreement.
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