The Monster Under the Bed: When a Home’s Past Holds an Unrecorded Deed

Image of a house with trees around it in the fall. Captioned: When a Home’s Past Holds an Unrecorded Deed

No homeowner wants to find out there’s a deed in the home’s past that went unrecorded. But it can happen.

In the normal transaction, at the time of the legal transfer of real estate, the deed is filed with the county recorder’s office, placing the new owner’s name in the public record. Why would anyone skip this step?

Sometimes It’s Deliberate…

Why they do it: Imagine a new owner who, to evade taxes, accepts a deed but does not record it. (Unless the parties are married, the transfer of a home between two people is subject to possible state gift tax, with federal gift tax due to the Internal Revenue Service.)

Why it’s wrong: This decision not to record is a selfish move in more ways than one. It could leave a seller on the hook for unwanted responsibilities. This is why some sellers get proactive, with an affidavit of deed. The affidavit shows that the transfer occurred, and when it occurred.

Why they do it: Imagine a business owner who thinks it’s a good idea to convey a deed into a limited liability company, and get around the transfer tax by leaving it unrecorded. 

Why it’s wrong: This defeats the purpose of creating a new business asset, because banks won’t see the unrecorded deed. And the owners are still personally liable for property taxes and other regular expenses.

Why they do it: Imagine someone trying to avoid probate, giving the deed to an intended beneficiary with instructions not to record it until after the first owner dies. 

Why it’s wrong: After the death occurs, multiple parties could dispute the right to the property, claiming, for example, that the deceased prior owner didn’t sign the deed.

These are just a few examples of the monster coming out from under the bed. And the monster can get bigger. Situations that happened earlier in the ownership history can come to light later after a chain of lenders and buyers have been involved with the property. No matter what the reasoning is behind a decision to leave a deed unrecorded, it’s a far better plan to keep an unambiguous chain of title and ensure marketable property.

State Laws and Unrecorded Deeds

Deliberate decisions to leave deeds unrecorded can harm unknowing parties, and states have had to legislate against people making deed transfers out of the public view. Some states impose penalties for failure to record a deed. Texas, for example, voids unrecorded real estate conveyances to safeguard the interests of later buyers and lenders.

Let’s say Jack decides to give a house to Jill, asking that the deed be recorded once Jack dies. Jill holds the recordable deed for years. But before dying, Jack makes an owner-financed sale to Jordan, who puts 10% down and records the deed. Who owns Jack’s house now?

When multiple parties claim to own the same real estate, the first one to get to the county courthouse and have their deed recorded usually prevails; state recording statutes lay out the possible situations, timings, and outcomes. In this case, Jordan would point out the general rule for an unrecorded gift deed: it’s voided when a bona fide purchaser without notice of the prior gift buys the house for value. In plain terms: If a “Jill” shows up out of the blue, claiming to own all or some of your property, yet Jill’s deed was unrecorded when you bought the home so you didn’t know of its existence, your interest is likely safe. You are a bona fide purchaser for value.

The Benefits of Doing the Right Thing

What should Jack and Jill have done differently? Jill should have insisted on a good, old-fashioned written will — or, if bypassing probate is a priority, a living trust — instead of attempting to accept a conditional gift deed. The Florida Bar recommends hiring a real estate lawyer to create a life estate for someone like Jack, who could use a deed, will, or trust agreement to do this. A lawyer could also oversee a contract for the deed, placing it in escrow until the death or other relevant occurrence actually happens.

Had Jack handled things in the standard way, with the home left to Jill in Jack’s last will, Jill would get the benefit of a stepped-up cost basis for the home. This way, if Jill wants to sell, there wouldn’t be capital gains tax on any appreciation on the home dating all the way back to when Jack first acquired it. Transferring the house upon death through a revocable living trust gets the same tax advantage.

In some states, there is the option of a transfer on death deed for real estate, to convey the home to a beneficiary through a notarized Affidavit of Death form.

These are all examples of the right way to transfer a house upon death. In each case, the deed receives the benefit of an official transfer and preserves a good chain of title.

If Jill had paid money to Jack for the house, would that have ensured Jill’s rights? Not necessarily. A buyer should record the deed. Otherwise there’s still a risk that Jack could sell the property twice. A later buyer who had no notice of Jill’s earlier deed because it went unrecorded is a bona fide purchaser, and is usually deemed the legitimate owner of the property.

Are unrecorded deeds always invalid? No. While some states, like North Carolina, expect a gift deed for real estate to be recorded within two years to be valid, most states don’t invalidate unrecorded deeds. But those deed transfers are valid only between the transferor and the recipient, and their heirs. The rest of the world — including the title insurance industry — lacks legal notice of the transfer, because there is no public record.

Key takeaways: Prevent problems and legal actions down the road. Never accept a deed you’re asked not to record. When you acquire real estate, be sure the deed is recorded immediately. The recorder’s office has instructions on what to include with the filing, and the fee and payment methods. PS: It’s a good idea to purchase an owner’s title policy. The title insurance company can explain to you how it handles the risk of unrecorded as well as improperly recorded deeds, and what conditions apply. 

The Problem With “Pocket Deeds”

A quitclaim is a legal document that transfers an interest in real property to another person. The quitclaim only conveys whatever ownership rights the person transferring the property actually has — with no guarantees. Quitclaim deeds are often used between relatives. Because these conveyances occur without professional assistance, they sometimes go unrecorded, creating title questions. For example, after the homeowner dies and the new owner steps up, how is it possible to prove there was an honest delivery of the deed between the parties if it wasn’t memorialized through a recording of the deed? This is what the Florida Bar calls “the problem with pocket deeds.”

In contrast to quitclaims, warranty deeds involve title companies. Title companies abhor ambiguity. They often refuse to insure property with an unclear ownership history, or they might require a court declaration first. By sending notice to anyone with potential ownership claims, a quiet title action can clear up ambiguities and assure the title company that no one has a competing interest in the property’s value.

Without this clarity, future owners will hold unmarketable title. And that can really haunt a house. As long as title defects or ambiguities remain, potential future buyers would have trouble getting title insurance and a mortgage.

Keep a Clean Title. Always Record the Deed.

If you hold a deed to real property, the last thing you need to jump at you are questions about whether you or a prior owner obtained the property legitimately, from a person with the right to transfer the house to you. Various and unexpected challenges can arise, given the complex title histories of most homes. But whenever deeds are challenged, their holders are in stronger positions if they have publicly recorded them.

Keep in mind that each state has its own recording statute, and each challenge is case-specific. So, if a monster ever does pop out from under the bed, meeting with a real estate attorney is the best way to proceed. We hope the tips above help you to recognize the pitfalls of unrecorded deeds, and the avoid preventable conflicts and expenses that may follow.

Photo credit: Phil Hearing, via Unsplash.