If you’re like most people planning to make a real estate purchase, you want to know that the property you’re purchasing is actually owned by the seller, that it’s in reasonably good shape, and that the title is free of defects. Real estate transactions aren’t always as seamless or clean as buyers might like, though. A special warranty deed—sometimes referred to as a limited warranty deed—warrants only against defects during the seller’s time as property owner. It will not protect against title issues that arose prior to the time the seller took occupancy. Consequently, it offers less protection to buyers, and more protection to sellers, than a general warranty deed, which is the most common option for selling or buying a property.
What is a Special Warranty Deed?
With a special warranty deed, the seller warrants that he or she is the rightful owner of the property, and is authorized to sell it. He or she provides a warranty only against defects in the title during his or her ownership.
Special warranty deeds are unusual for residential real estate transactions, since it’s risky for people to move into a home when they don’t know the title’s history. But these sorts of deeds are common among bank-owned properties, when a property has been foreclosed upon, and in commercial and corporate real estate transactions.
Special warranty deeds usually contain specific language transferring the property, indicating that the seller “grants, conveys, and specially warrants” the property.
The Practical Effects of a Special Warranty Deed
Humans are creatures of habit, which means we tend to assume that, if something has been going well, it will continue to do so. In the case of a special warranty deed, this can have unanticipated consequences. You might assume that, because the seller had no problems with the property title, the same will hold true for you. But understanding the practical effects of a special warranty deed can help you reasonably assess whether you want to take on the risk associated with such a deed.
One common scenario in the world of title defects is outstanding property taxes. Say you purchase a property the seller has owned for 10 years, reasonably believing that such a long ownership tenure suggests that there must be nothing wrong with the title. Meanwhile, a local election has brought a county commissioner into power who wants to crack down on back property taxes.
Unbeknownst to you, the county commissioner asks her staff to seek out people who owe back taxes, and they find that, three owners ago, that particular owner went years without paying his or her taxes. Suddenly they’re coming after you for the balance, and because you have a special warranty deed, there’s little you can do. You can’t take any action against the seller, and unless you have title insurance, you could be stuck choosing between paying someone else’s taxes and facing a lien on your property.
Why Sellers Use Special Warranty Deeds
A special warranty deed offers significant liability protection to sellers, which might help explain why sellers use it when they’re not sure about a property’s history. Some common scenarios in which sellers use special warranty deeds include:
- Bank-owned properties due to a foreclosure, since the bank might not know the full history of the title, and the foreclosure history suggests there might be a history of title issues and debts.
- Commercial properties that have changed ownership several times. For instance, a commercial vendor that purchases a building from an individual who purchased the building at a foreclosure auction might use a special warranty deed, since the property’s long history makes it difficult to assess the status of the title.
Some sellers use special warranty deeds as a matter of course. A real estate investor or a large bank might use special warranty deeds for each transaction. When a seller routinely uses a special warranty deed, you may be able to talk him or her into using another method. You may also find that there’s no actual reason to use a limited warranty deed because the title is clean.
If You are Offered a Special Warranty Deed
If the other party offers you a special warranty deed, begin by asking if they’d consider a general warranty deed. Some grantors simply gravitate to special warranty deeds as a force of habit, but requesting another deed may convince the grantor to provide it in order to get your business.
If this strategy doesn’t work, consult with a skilled real estate lawyer—ideally one with experience working in the locale where you are contemplating buying property and, if possible, one who has previously worked with the seller from whom you would like to make a purchase. Your lawyer will likely begin by conducting a title search. A title search will reveal the full history of the title to the property, helping you assess whether there are any issues with the title. Armed with that knowledge, you are better equipped to decide whether you’re willing to take on those risks.
If there is an issue with the title, it doesn’t necessarily mean you shouldn’t buy the property. A small lien for back taxes might be worth paying if you got the property for a steep discount at a foreclosure sale, but a title defect that significantly diminishes the value of the property might be an entirely different story. Only an experienced real estate lawyer can advise you about the best course of action for your situation.
The Role of Title Insurance
If you purchase property with a special warranty deed, title insurance is a must—and if you have a mortgage, your lender will probably require it anyway. Title insurance protects lenders and purchasers against undiscovered defects in the property’s title, and helps resolve issues if they arise. It’s important to note that the title insurance policies most lenders require protect only the lender’s interest in the property. If you’re concerned about title defects, or a title search has revealed there might be issues, you may want to consider investing in an owner’s title insurance policy.
Your lawyer can help you select an appropriate title insurance policy. In most cases, you should seek insurance equal to the value of the property, but ask your lawyer first; in some scenarios, you may want to pursue title insurance in a different amount. For instance, purchasing a restriction endorsement could offer you protection if your home violates the requirements of your homeowners association.
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A special warranty deed can open the door to the property of your dreams, but they are not without risk. Save time and money by contacting an attorney to find out if a special warranty deed is right for your situation.