What is a Special Warranty Deed?
A special warranty deed is a real estate deed in which the seller of the property, known as the grantor, guarantees only anything that has occurred during your physical ownership. In other words, the grantor does not guarantee against any clear title defect that existed prior to taking possession of the property.
Special Warranty Deeds are most often used in commercial property transactions. Single-family and other residential property transactions will generally use a general warranty deed. Many mortgage lenders insist on the use of the blanket deed of guarantee. Special warranty deeds go by many names in different states, including agreement deed, grant deed, and limited warranty deed.
Understanding the Warranty Deeds
A warranty deed provides for the transfer of ownership or title to commercial or residential real estate and comes with certain guarantees made by the seller. These warranties include that title to the property is transferred free of any property rights, liens or outstanding mortgages or other encumbrances by persons or entities other than the seller.
A special warranty deed, also known as a limited warranty deed, is a variation of the general warranty deed. The general warranty deed is the most common and preferred type of instrument used to transfer title to real estate in the United States.
What do general warranty deeds identify as special?
- The name of the seller: the grantor
- The name of the buyer: the beneficiary
- The physical location of the property
- The property is free of debts or encumbrances other than those indicated in the deed.
- The grantor warrants that he is the rightful owner of the property and has the legal right to transfer title.
- The grantor warrants that the property is free of all liens and that there are no pending claims on the property from any creditor using it as collateral.
- There is a guarantee that the title will withstand any third party claims to ownership of the property.
- The grantor will do whatever is necessary to enforce title to the dealership.
Both deeds provide the same general protections for the buyer. However, the main difference between a special warranty and a general warranty deed is how they treat the term of protection given to the title property.
Special Warranty Deed
While the use of the word “special” may convey to the buyer that the deed is of higher quality, the special warranty deed is less comprehensive and offers less protection due to the limited time period it covers. In residential property, special warranty deeds are frequently used in foreclosures and forced sales of the property to pay off a debt.
A general guarantee deed covers the entire history of the property. Guarantees that the property is free from defects or encumbrances, no matter when they occurred or under whom the owner was owned. The general warranty deed assures the buyer that they are obtaining all rights to the property without potential valid legal problems with the title
With a special warranty deed, the warranty covers only the period the seller had title to the property. Special warranty deeds do not protect against any errors in free and clear title that may have existed prior to the seller’s property. Therefore, the grantor of a special warranty deed is only liable for debts, problems, or other encumbrances to the title that he caused or that occurred during his ownership of the property. The dealer assumes responsibility for any problems arising from the previous owners.
Example of Special Warranty Deed
As an example, imagine that a house has had two previous owners before you. The first owner was a hoarder, and soon the house and garden fell into disrepair. The city code enforcement department issued citations against the owner who attached to the property. The owner fell behind on his mortgage and the bank foreclosed, selling the house to the second owner.
To the delight of the neighborhood, the new owner has spruced up the house and cleaned up the yard. After 10 years, they put the house on the market and you buy it with a special guarantee deed. A few years later he decides to sell the house. However, because code enforcement liens continue against the property, they could hinder its sale. At a minimum, you will need to satisfy the city’s lien to release the title.
Title Searches and Title Insurance
Most of the time, a title search will uncover any liens or claims on the title of a property. A title search is a review of available public records to determine ownership of property. Attorneys, title companies, and individuals can complete title searches to verify ownership of property. While these searches are extensive, there is always the chance that you may miss something.
For this reason, most buyers, regardless of the type of warranty deed they use, also purchase title insurance when purchasing a property. Title insurance is an indemnity insurance policy that protects the buyer from financial claims against the title of a property they own. Pros
- Special warranties allow the transfer of property title between the seller and the buyer.
- Purchasing title insurance can mitigate the risk of claims prior to the special warranty deed.
- Special warranty deeds provide limited protection to beneficiaries or purchasers.
- Special warranty deeds cover only the period of ownership by the grantor or seller.
Real World Example
Although general warranty deeds are more common in residential real estate transactions, there is one area where the special warranty deed becomes the norm. This field is for foreclosed properties, REOs, or properties sold short.
Most Federal National Mortgage Association (FNMA), Housing and Urban Development (HUD), and bank-owned residences sell with this type of deed. Perhaps one of the main reasons for the use of special guarantee deeds is that the selling authority does not want to be responsible for any situation related to the property before the seizure.
For example, in 2012, a couple with a home in Grenada County, Mississippi, defaulted on their property loan. In February 2013, the property was foreclosed on by its lender, Wells Fargo Bank. Subsequent legal documents indicated that Wells Fargo “delivered the property to FNMA in a special security deed.”
- A special warranty deed is a deed in which the seller of a property only guarantees against problems or encumbrances on the property title that occurred during their ownership.
- A special warranty deed guarantees two things: the grantor owns and can sell the property; and the property did not incur liens during his ownership.
- A special warranty deed is more limited than the more common general warranty deed, which covers the property’s entire history.