Deed
A legal written document that transfers possession of real property from one entity to another. Deeds are recorded at time of sale and when purchasing real estate, it is important to have a title search done where, among other things, a title company will review all the public records to see the chain of title, meaning they will review all the previous deeds recorded in connection with a property and if there were any breaks or gaps.
Below are some common types of deeds
- General Warranty Deed
- Special Warranty Deed (Limited Warranty Deed)
- Quitclaim Deed
- Bargain and Sale Deed
- Grant Deed
Putting ‘Deed’ in Context
Magnolia Capital, a real estate private equity firm, is in the process of acquiring SouthPark Gardens Apartments, a 150-unit market-rate multifamily property in Charlotte, North Carolina. The property, built in 2010 and currently 95% occupied, is listed for $35 million. As part of the core acquisition strategy, the firm’s focus is on acquiring stabilized, well-located assets that can generate steady cash flow with minimal risk.
Deed Review During Due Diligence
As the associate overseeing the due diligence process, it’s your responsibility to ensure there are no issues with the property’s title. A key part of this process involves a thorough review of the deed—the legal document that transfers ownership of the property from the seller to Magnolia Capital. The title company, which was hired to perform the title search, will go through public records to examine the chain of title—a record of all previous transfers of ownership.
During this review, the title company uncovers a Special Warranty Deed that was used when the current owner purchased SouthPark Gardens Apartments. A Special Warranty Deed guarantees that the seller has not caused any title defects during their ownership but does not cover any issues that may have arisen before they owned the property.
Implications of a Special Warranty Deed
While the Special Warranty Deed protects Magnolia Capital against issues that occurred during the seller’s ownership period, there’s still some level of risk if a title defect from a prior owner surfaces. For example, if a previous owner failed to pay taxes on the property or if there was an unrecorded lien, Magnolia Capital might be responsible for resolving those issues. This is different from a General Warranty Deed, which would provide broader protection by guaranteeing a clear title for the entire history of the property, not just the current seller’s period of ownership.
To mitigate the potential risk, Magnolia Capital works closely with the title company to purchase title insurance, which provides protection against any unforeseen title issues, regardless of the type of deed used.
Different Types of Deeds in Real Estate
In this case, the Special Warranty Deed being transferred to Magnolia Capital reflects a moderate level of protection. Other deed types that might have been involved include:
- General Warranty Deed: Would have provided full protection from title defects throughout the entire history of the property.
- Quitclaim Deed: Would offer the least protection, as it only transfers the seller’s interest in the property without any guarantees about the title’s quality.
- Bargain and Sale Deed: Common in foreclosures or distressed property sales, this would transfer ownership without warranties against title defects.
Ultimately, the deed plays a crucial role in ensuring the smooth transfer of property ownership. Magnolia Capital can complete its acquisition of SouthPark Gardens Apartments knowing that the title is secured and protected by both the Special Warranty Deed and title insurance.
Frequently Asked Questions about the Term “Deed” in Commercial Real Estate
What is a deed in commercial real estate?
A deed is a legal written document that transfers possession of real property from one entity to another. It is recorded at the time of sale to establish the new owner in public records.
Why is a title search important during due diligence?
A title search is important because it reveals the chain of title and identifies any breaks, gaps, or defects that could affect ownership. This helps ensure that the buyer is receiving clean title to the property.
What is a Special Warranty Deed?
A Special Warranty Deed guarantees that the seller has not caused any title defects during their ownership, but it does not cover issues that may have occurred before their ownership period.
How does a Special Warranty Deed compare to a General Warranty Deed?
A General Warranty Deed provides full protection from title defects across the entire history of the property. In contrast, a Special Warranty Deed only covers the seller’s period of ownership.
What is a Quitclaim Deed and when is it used?
A Quitclaim Deed transfers the seller’s interest in the property without any warranties or guarantees about title. It offers the least protection and is typically used in low-risk or non-arm’s-length transactions.
What role does title insurance play in a real estate transaction?
Title insurance protects the buyer from unforeseen title issues, such as prior liens or defects not covered by the deed. Magnolia Capital, for example, purchased title insurance to mitigate risks associated with their Special Warranty Deed.
What other types of deeds are common in CRE transactions?
Other types include:
Bargain and Sale Deed: Often used in foreclosures; transfers ownership without title warranties.
Grant Deed: Common in some U.S. states; implies the seller has not transferred title to anyone else and that the property is free of undisclosed encumbrances.
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