Two weeks ago I wrote a blog about the importance of buying title insurance for investment properties. Most people don’t think they’ll ever actually make a claim on a title policy, but the chances may be higher than most people realize. I’ve actually had to file 3 title claims just this year and as a result, have become very vigilant in understanding my liability as well as my protection.
Most investors have heard of or used a Quit Claim Deed as a method of granting title to another person or entity (i.e. LLC, S-Corp, Trust, etc). This method of liability protection is fairly popular because just about all conventional lenders require an investor to guarantee and take title to a property in his or her personal name. However, once the loan is closed, investors typically use a Quit Claim Deed to move title into an entity with some form of liability protection.
I have to admit that I am not only guilty of doing this on my own properties, but have coached other investors to do the same. For years, I’ve heard real estate gurus and professionals talk about “Quit Claiming” properties out of your personal name for asset protection. This is why it came as a bit of a shock to me when I was sitting in my attorney’s office this week and he asked me why in the world I was using a Quit Claim Deed to move properties into my LLC. The main problem with using a Quit Claim Deed is that it essentially nullifies the title policy that was obtained when the property was purchased in a personal name. Once title is conveyed to the new entity, the Quit Claim warrants nothing for the new title holder (i.e. your entity!). If a title issue was to come up after the property had been Quit Claimed to the new entity, it is highly likely that the title policy would not cover the entity’s claim.
The easy solution to this problem is to use a Warranty Deed instead of a Quit Claim Deed. The reason being that a Warranty Deed not only conveys ownership, but warrants that the title is clear of encumbrances. As a result, if an issue with the title arises down the road, the grantee (i.e. your corporate entity) would have legal recourse against the grantor (you) and the title policy would be in effect to cover the claim.
My advice, always consult with an attorney before transferring title to any person or entity. I know from experience that many attorneys will simply file a Quit Claim Deed for you without asking any questions or making recommendations. As investors, it is imperative that we ask the right questions and confirm that any conveyance is done in the right manner and with the proper protections in place.
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That is a great heads up. I have a few questions. Why wouldn’t you just get a quit claim deed for the LLC? Also, what is the difference between a quit claim deed and a warranty deed besides the ability to transfer?
Here’s a good article the explains the difference between a Quit Claim Deed and a Warranty Deed: http://www.bankrate.com/brm/news/mortgages/20040826a1.asp
Thanks for bringing this up. Too many new investors buy into this guru crap and shoot themselves in the foot. You should run, not walk, away from Quit Claim Deeds.
Funny story for you. I was doing title research on a property where the owner (after going to some hotshot guru course I bet) started using quit claim deeds to deed off 1% of his title interest at a time to other newbie investors. He did this about 10 times over a period of 3 years before the lender found out and took him to court. The public records show that the county clerk was forced by the courts to invalidate all those quit claim deeds that had been filed in the record.
Most of the people are not even known to these terms. I mean they can make claim, and such. It’s better if they find the property insurance as soon they buy the property.
Question- If there is a title problem would you need to sue the title company & the person who transferred bad title to you/seller (ie yourself) in order to get it corrected? In the end both ways of transferring title seem to lead down the same path.
The way I understand it, if you use a Quit Claim Deed to transfer title and a title issue arises – you don’t really have a claim against the grantee (you personally) because the Quit Claim essentially says “I am not warranting anything regarding the title.” Thus, since you transferred the property to your business entity without any warranties regarding title, the entity doesn’t have a claim.
However, if you used a Warranty Deed to transfer title, you would have a claim against the grantee because you are in essence warranting that there are no issues with title. Thus, the original title policy would be in effect insuring the grantee against this claim.
I think you may need to check your facts with a title professional. If you turn your property over to some one else, it doesn’t make any difference what kind of deed you use, the title policy stops. The title policy is only good for as long as the person who purchased the policy is in title. Once the property is transferred, the policy is null and void.
Technically, Art is correct; the title policy itself affords no protection itself to the grantee in the warranty deed. But since a warranty deed conveys all warranties of title, then a defect gives rise to a cause of action against a grantor – and potentially a tie back to the original policy.
Grantee sues grantor, grantor is damaged, and – depending on the defect; all of this would be very fact-specific – grantor makes a claim. While the title insurer has no direct duty to the warranty deed grantee, our experience has been that they know that they’re ultimately on the hook and usually move quickly to settle the issue.
It’s the preservation of the cause of action that’s important.
If a quitclaim deed is used for the transfer, there is no warranty of title whatsoever; if a title defect is discovered, then the quitclaim grantee has no recourse as against the grantor. No recourse means no link back – and the grantee is completely out of luck.
Out curiosity for what value (if any) did your attorney structure the transfer? I am an attorney and plan on moving my client’s investment properties into a new company. I plan on doing it via warranty deed based on the aforementioned title policy issues that could arise, however, from the perspective of trying to keep the transaction at arms length to avoid piercing the corporate veil and fraudulent conveyance issues, was there an actual “sale” of the land to the company or did your attorney simply gift them over?
Very interesting! Can a quitclaim deed be changed back into a warranty deed? How would one do this…..would they have to do a title search all over again or buy title insurance? Sounds confusing, but we purchased our property, had the warranty deed, made a change using a quitclaim. A friend of mine said that the quitclaim deed is one of the lowest forms of deeds one can have, so I am trying to remedy the problem is I can. Thanks!
Candice,
Did you ever get your answer in how to make your dead stronger, ie, a property acuired via Quit Claim being converted to a General Warrenty Deed.
Ok. I have a client that I am doing a Ladybird deed for to a Trust. the Warrenty Deed my client provided has the following exerpt “Together with all and singular the tenements, hereditaments, and appurtenances thereunto belonging or in anywise appertaining for the sum of less than One Hundred Fifty-Three Thousand Thirty One & oo/100. ($153,131.00), Dollars.” Now i inserted this in the Lady bird deed that I drafted and I am curious to know if this is only because the Warrenty Deed was an LLC conveying to an individual, therefore the individual was purchasing this property from the LLC. Basically, I want to knwo if I was wrong to include the exerpt and omit it from the Ladybird Deed?
While this can happen in some cases, what the author has described above is not necessarily a rule of thumb. In most title insurance policies that I have seen, whether coverage will extend to a transferee depends on the title insurance company’s definition of the word “Insured” in the policy. Most policies now have a definition that states an “Insured” is also “a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title if the stock, shares, memberships or other equity interests of the grantee are wholly-owned by the named Insured.” Such a definition is designed so that real estate investors who regularly contribute their property as capital to their wholly owned companies are not left high and dry in the event there is a title claim. This would have covered the author in his transaction if the policy stated such and whether the author conveyed by quitclaim or warranty deed would have been irrelevant. Additionally, there are definitions for “Insured” in the policies I have seen that cover other situations like deeding properties to trusts, from subsidiaries to parent companies, affiliates, etc.. My advice to anyone would be to look at your title policy first.
Using a warranty deed versus a quitclaim deed becomes problematic if the transferee is not an insured under the policy but under common control by the grantor and grantee. As an example, if you deed your property to an LLC wholly owned by you (assuming the LLC doesn’t qualify as an insured) and then your company runs into a title issue, theoretically, the LLC (owned by you) would sue YOU individually and your title insurance company would step in to indemnify you by either paying out the claim or resolving the title defect. However, if YOU individually quit claim deed the property to your LLC, then the title insurer is not going to indemnify, because they are going to say that when you quit claim something, you are not warranting the title and therefore have not created any sort of liability. If you however deed via a warranty deed then you are warranting and ensuring good title, therefore, liability would be created if in fact a title issue did arise and you had to result to using your company to sue yourself individually so your insurer would be required to indemnify you.
good information, thank you. my wife and i purchased a property in 2005 and quit claim deeded the property to an LLC in 2009 upon the advice of our accountant. we are selling the property and discovered that a shared well agreement was in place, but improperly executed. the buyers lender will not close unless a new agreement is in place. first, do we have a title insurance claim? second, you state “If a title issue was to come up after the property had been Quit Claimed to the new entity, it is highly likely that the title policy would not cover the entity’s claim.” since the title issue was present prior to our quit claim deed, will the policy respond? if not, can we simply quit claim deed the property back to make sure the policy responds? thank you!
I am the owner of record of a vacant lot in the city of Chicago. On this lot once stood a property which the mortgagee never completed the foreclosure. The mortgagee demolished said property without completing foreclosure and now city of Chicago is holding me liable for placing a fence around this vacant lot. It appears mortgagee has not intention to complete foreclosure. I am now being fined by the city of Chicago. Could I quit claim this property to an LLC which I create to prevent city of Chicago from coming after my personal assets?
My grandfather wants to quick claim the deed to his house to my mother. She is going to pay him $82,000 for the house, to buy off her siblings. My grandfather is stage IV melanoma and very close to the end. If he quick claim deeds his house and passes away a day or two later, could the transaction be put to a hault to (let’s say) probate or is it final at his signature time?
My parents want to give me their house, it a quit claim deed the way to go? What about clawback provisions if one of them end up under state care–what is the time frame in the state of Minnesota?