6.4 Title and deed

Title and deed are crucial elements in real estate transactions. They define ownership rights, transfer of property, and legal protections for buyers and sellers. Understanding these concepts is essential for assessing risks and benefits in real estate investments.

This topic covers various types of property titles, components of deeds, and the title search process. It also explores common title issues, different deed types, recording procedures, and the importance of title insurance in protecting property interests.

Types of property titles

• Property titles define the legal rights and interests that individuals or entities hold in real estate
• Different types of titles grant varying levels of ownership, control, and duration of possession
• Understanding the distinctions between title types is crucial for real estate investors to assess the risks and benefits associated with each form of ownership

Fee simple title

Top images from around the web for Fee simple title

• 

  Real Estate - Free of Charge Creative Commons Highway Sign image View original

  Is this image relevant?

• 

  Real Estate Investment - Free of Charge Creative Commons Chalkboard image View original

  Is this image relevant?

• 

  Real Estate Investments - Free of Charge Creative Commons Suspension file image View original

  Is this image relevant?

• 

  Real Estate - Free of Charge Creative Commons Highway Sign image View original

  Is this image relevant?

• 

  Real Estate Investment - Free of Charge Creative Commons Chalkboard image View original

  Is this image relevant?

1 of 3

Top images from around the web for Fee simple title

• 

  Real Estate - Free of Charge Creative Commons Highway Sign image View original

  Is this image relevant?

• 

  Real Estate Investment - Free of Charge Creative Commons Chalkboard image View original

  Is this image relevant?

• 

  Real Estate Investments - Free of Charge Creative Commons Suspension file image View original

  Is this image relevant?

• 

  Real Estate - Free of Charge Creative Commons Highway Sign image View original

  Is this image relevant?

• 

  Real Estate Investment - Free of Charge Creative Commons Chalkboard image View original

  Is this image relevant?

1 of 3

• Represents the highest form of property ownership, granting the titleholder absolute rights to possess, use, and dispose of the property
• Fee simple ownership is perpetual and can be freely transferred or inherited, subject only to government powers such as taxation and eminent domain
• Most residential and commercial real estate transactions involve the transfer of fee simple titles (single-family homes, apartment buildings, office buildings)
• Fee simple owners have the right to lease, mortgage, or sell the property without restrictions, unless voluntarily agreed upon

Leasehold title

• Grants the titleholder the right to possess and use the property for a specified period, as outlined in a lease agreement with the fee simple owner
• Leasehold interests are typically long-term arrangements (99 years) and are common in commercial real estate (shopping centers, hotels)
• Leaseholders are bound by the terms and conditions of the lease, which may include restrictions on property use, subletting, and improvements
• At the end of the lease term, the property and any improvements revert back to the fee simple owner, unless the lease is renewed or extended

Life estate title

• Grants the titleholder (life tenant) the right to possess and use the property for the duration of their lifetime or the lifetime of another specified individual
• Upon the death of the life tenant or specified individual, the property title automatically transfers to a predetermined remainderman
• Life estates are often used in estate planning to provide housing for a surviving spouse or dependent while ensuring the property ultimately passes to the intended heirs
• Life tenants are responsible for property maintenance, taxes, and other expenses but cannot sell or mortgage the property without the remainderman's consent

Equitable title

• Represents the beneficial ownership of a property, granting the titleholder the right to enjoy the benefits of ownership without holding legal title
• Equitable title is typically held by the buyer in a land contract or installment sale, where the seller retains legal title until the buyer fulfills the contract terms
• Buyers with equitable title have the right to possess and use the property but may face restrictions on selling or mortgaging the property until legal title is obtained
• Equitable title can be converted to legal title once the buyer satisfies the contract obligations, such as completing all installment payments

Components of a deed

• A deed is a legal document that conveys the ownership rights of a property from one party to another
• Deeds must contain specific components to be considered valid and enforceable, ensuring a clear transfer of title

Grantor and grantee

• The grantor is the party transferring ownership rights, while the grantee is the party receiving those rights
• Deeds must include the full legal names and addresses of both the grantor and grantee to identify the parties involved in the transaction
• If the grantor or grantee is a legal entity (corporation, LLC, trust), the deed should include the entity's name and the name and title of the authorized signatory

Legal description of property

• Deeds must include a precise legal description of the property being conveyed to avoid ambiguity and potential disputes
• Legal descriptions typically use one of two methods:
  1. Metes and bounds, which describes the property boundaries using distances, angles, and landmarks
  2. Lot and block, which references a recorded plat map and specifies the lot and block numbers
• The legal description should be identical to the one found in the previous deed to maintain a clear chain of title

Words of conveyance

• Deeds must include specific language that clearly expresses the grantor's intent to transfer ownership rights to the grantee
• The most common words of conveyance are "grant, bargain, and sell" or "convey and warrant," depending on the type of deed and the jurisdiction
• Words of conveyance may also include any restrictions, reservations, or conditions that the grantor wishes to impose on the transfer

Consideration

• Deeds typically include a statement of consideration, which acknowledges that the grantor has received something of value in exchange for the property
• Consideration can be monetary (purchase price) or non-monetary (love and affection, exchange of properties)
• The actual amount of consideration is often nominal ($1 or$10) to protect the privacy of the parties, as deeds are public records

Signature and notarization

• The grantor must sign the deed in the presence of a notary public to acknowledge their identity and voluntary execution of the document
• The notary will verify the grantor's identity, witness the signature, and affix their official seal to the deed
• Some jurisdictions may require additional witnesses to the grantor's signature, depending on the type of deed and local laws
• Proper notarization is crucial to prevent fraud and ensure the deed is legally binding and recordable

Title search process

• A title search is a thorough examination of public records to determine the legal ownership and any encumbrances or defects associated with a property
• The purpose of a title search is to ensure that the seller has the legal right to transfer clear and marketable title to the buyer

Chain of title

• The chain of title is a chronological record of all previous ownership transfers, liens, and encumbrances affecting a property
• Title searchers review deeds, mortgages, court judgments, and other public records to trace the property's ownership history back to the original grant or patent
• Any gaps or irregularities in the chain of title (missing deeds, incorrect names) must be investigated and resolved before the title can be considered clear

Identifying encumbrances and liens

• Encumbrances are claims or interests in a property that may limit the owner's rights or affect the property's value, such as easements, restrictions, or leases
• Liens are legal claims against a property that secure the payment of a debt or obligation, such as mortgages, property taxes, or mechanic's liens
• Title searchers must identify all existing encumbrances and liens to determine their impact on the property's marketability and inform the buyer of any potential liabilities

Role of title companies

• Title companies are professional firms that specialize in conducting title searches, issuing title insurance policies, and facilitating the closing process
• They employ experienced title searchers and attorneys to review public records, identify potential issues, and provide a title report summarizing their findings
• Title companies also act as escrow agents, holding funds and documents until all closing conditions are met and then disbursing funds and recording the deed

Title insurance policies

• Title insurance is a contract that protects property owners and lenders against financial losses resulting from defects or challenges to the property's title
• Based on the title search results, title companies issue insurance policies that cover specific risks and provide legal defense and indemnification for covered claims
• There are two main types of title insurance:
  1. Owner's policy, which protects the buyer's ownership interest
  2. Lender's policy, which protects the mortgage lender's security interest
• Title insurance is a one-time premium paid at closing and remains in effect for as long as the policyholder owns the property or holds the mortgage

Common title issues

• Title issues are defects or irregularities in a property's ownership history that can lead to legal disputes, financial losses, or difficulties in selling or refinancing the property
• Identifying and resolving common title issues is crucial for ensuring a smooth and successful real estate transaction

Easements and encroachments

• Easements are legal rights granted to third parties to use or access a portion of the property for specific purposes, such as utility lines, driveways, or conservation areas
• Encroachments occur when a structure or improvement from a neighboring property extends onto the subject property without permission, such as a fence or a building
• Both easements and encroachments can impact the property's value, marketability, and intended use, so buyers must be aware of their existence and potential consequences

Boundary disputes

• Boundary disputes arise when there is a disagreement between adjacent property owners regarding the location of the property line or the extent of their respective ownership rights
• These disputes can be caused by inaccurate or ambiguous legal descriptions, conflicting surveys, or physical changes to the land over time (erosion, accretion)
• Resolving boundary disputes may require legal action, such as a quiet title lawsuit or a boundary line agreement, which can be costly and time-consuming

Unpaid taxes or assessments

• Properties with delinquent property taxes, special assessments, or other municipal charges can be subject to tax liens or even foreclosure if left unpaid
• Tax liens take priority over most other liens and encumbrances, meaning that the government can seize and sell the property to recover the unpaid amounts
• Buyers must ensure that all outstanding taxes and assessments are paid in full at closing or that sufficient funds are withheld from the sale proceeds to satisfy these obligations

Fraudulent or forged deeds

• Fraudulent deeds are documents that purport to transfer ownership rights without the true owner's knowledge or consent, often through identity theft or forgery
• Forged deeds are documents that bear a false or unauthorized signature, attempting to convey title from someone who lacks the legal authority to do so
• These fraudulent activities can create gaps or inconsistencies in the chain of title, making it difficult for subsequent buyers to obtain clear and marketable title
• Thorough title searches and title insurance policies can help detect and protect against losses resulting from fraudulent or forged deeds

Deed types and characteristics

• Deeds are legal instruments that convey ownership rights in real property from one party (grantor) to another (grantee)
• Different types of deeds offer varying levels of protection and warranties to the grantee, depending on the specific language used and the grantor's obligations

General warranty deed

• Offers the highest level of protection to the grantee, as the grantor promises to defend the title against any and all claims, including those that arose before the grantor owned the property
• The grantor assumes responsibility for any title defects or encumbrances, even if they were not disclosed or known at the time of the transfer
• General warranty deeds are most commonly used in arm's length transactions, such as the sale of a home or commercial property

Special warranty deed

• Provides a more limited level of protection than a general warranty deed, as the grantor only promises to defend the title against claims that arose during their period of ownership
• The grantor is not responsible for any title defects or encumbrances that existed before they acquired the property
• Special warranty deeds are often used in commercial real estate transactions or when the grantor is a trustee, executor, or fiduciary with limited knowledge of the property's history

Quitclaim deed

• Conveys whatever interest the grantor has in the property, if any, without making any warranties or representations about the quality of the title
• The grantee receives the property "as is" and assumes all risks related to potential title defects or competing claims
• Quitclaim deeds are commonly used to transfer property between family members, to remove a former spouse from title after a divorce, or to clear up title defects

Grant deed

• Specific to certain states (California), a grant deed offers an intermediate level of protection between a general warranty deed and a quitclaim deed
• The grantor implicitly promises that they have not previously conveyed the property to another party and that the property is free from any encumbrances created by the grantor
• Grant deeds do not warrant against title defects or claims that arose before the grantor owned the property

Bargain and sale deed

• Conveys the grantor's interest in the property to the grantee, with the implied promise that the grantor has the legal right to transfer title
• Bargain and sale deeds do not warrant against any specific encumbrances or title defects, and the grantee assumes the risk of any pre-existing issues
• These deeds are often used in tax sales, foreclosure sales, or other situations where the grantor may not have complete knowledge of the property's title history

Recording and transfer of deeds

• The recording of deeds is the process of filing the executed deed with the appropriate local government office, typically the county recorder or registry of deeds
• Recording a deed provides public notice of the transfer of ownership and helps establish priority among competing claims or interests in the property

Local government recording process

• The buyer or their agent submits the original signed and notarized deed to the county recorder's office, along with any required forms and fees
• The recorder's staff reviews the deed for compliance with state and local requirements, such as proper formatting, signatures, and legal descriptions
• If the deed is accepted, the recorder stamps the document with a unique identification number, book and page reference, and the date and time of recording
• The recorded deed becomes part of the public record and is indexed by the grantor and grantee names for easy reference

Constructive notice vs actual notice

• Recording a deed provides constructive notice to the public of the transfer of ownership, meaning that anyone dealing with the property is legally presumed to have knowledge of the recorded deed, even if they have not actually seen it
• Actual notice refers to a person's direct and personal knowledge of a fact or event, such as being informed of a deed transfer by the parties involved
• Constructive notice takes priority over actual notice in most cases, emphasizing the importance of promptly recording deeds to protect one's ownership rights

Statute of frauds requirements

• The statute of frauds is a legal principle that requires certain types of contracts, including those conveying real property, to be in writing and signed by the party to be charged
• Deeds must satisfy the statute of frauds to be legally enforceable, meaning they must be written, contain a clear description of the property, and be signed by the grantor
• Verbal promises or agreements to transfer real estate are generally not binding unless they are reduced to a written deed that complies with the statute of frauds

Delivery and acceptance of deeds

• In addition to being properly executed and recorded, deeds must also be delivered by the grantor and accepted by the grantee to be effective
• Delivery can be actual (physically handing over the deed) or constructive (placing the deed in the grantee's control or in the hands of a third party for the grantee's benefit)
• Acceptance can be express (signing an acknowledgement of receipt) or implied (taking possession of the property or exercising ownership rights)
• The specific requirements for delivery and acceptance may vary by state, but the general principle is that both parties must intend for the transfer of ownership to occur

Title insurance coverage

• Title insurance is a type of indemnity policy that protects property owners and lenders against financial losses resulting from defects, liens, or encumbrances on the property's title
• Unlike other types of insurance that cover future events, title insurance covers past events or issues that may affect the property's marketability or value

Owner's policy vs lender's policy

• An owner's policy protects the buyer's ownership interest in the property and is typically purchased as an optional coverage at closing
• The owner's policy remains in effect as long as the buyer or their heirs own the property, and the coverage amount is based on the purchase price
• A lender's policy, also known as a loan policy, protects the mortgage lender's security interest in the property and is usually required as a condition of financing
• The lender's policy coverage amount decreases as the loan is paid down and terminates when the mortgage is satisfied or refinanced

Standard coverage vs extended coverage

• Standard coverage policies protect against common title defects, such as errors in public records, forgery, fraud, and undisclosed liens or encumbrances
• Extended coverage policies, also known as ALTA (American Land Title Association) policies, offer additional protection against risks not covered by standard policies, such as boundary disputes, zoning violations, and mineral rights issues
• Extended coverage policies typically require a more comprehensive title search and survey and may have higher premiums than standard policies

Exclusions and exceptions

• Title insurance policies contain exclusions, which are general categories of risks that are not covered, such as governmental regulations, eminent domain, and environmental hazards
• Exceptions are specific items or issues that are identified during the title search and are excluded from coverage, such as recorded easements, restrictions, or liens
• Buyers and lenders should carefully review the list of exclusions and exceptions in their policies to understand the scope of their coverage and any potential gaps

Claims process and resolution

• If a covered title defect or challenge arises, the policyholder must promptly notify the title insurance company and provide supporting documentation
• The title company will investigate the claim and determine whether it is covered under the policy terms and conditions
• If the claim is valid, the title company will either defend the policyholder's title in court or compensate them for any actual losses incurred, up to the policy coverage amount
• In some cases, the title company may also work to cure the title defect by obtaining releases, correcting errors, or negotiating settlements with adverse parties

Marketable title standards

• Marketable title refers to a property title that is free from reasonable doubt, readily transferable, and acceptable to a prudent buyer or lender
• Marketable title standards are legal and industry guidelines that establish the criteria for determining whether a property's title is sufficiently clear and free from defects

Clear title requirements

• A clear title is one that is not subject to any encumbrances, liens, or claims that could interfere with the owner's rights or the property's value
• To be considered clear, a title must have an unbroken chain of ownership, with all previous transfers properly executed, acknowledged, and recorded
• The title must also be free from any outstanding mortgages, judgments, tax liens, or other financial obligations that have not been satisfied or released

Curing title defects

• Curing title defects involves taking legal or administrative actions to remove or resolve any issues that cloud the property's title
• Common methods of curing title defects include:
  • Obtaining releases or quitclaim deeds