Quick & Dirty: Why the Quitclaim Deed is Bad for Business

I get it. Who the heck has ever used the word “quitclaim” in conversation? It’s an unfamiliar word. So it’s not surprising, then, that many people mishear the term and instead think that they’re hearing “quick claim.” There’s a pervasive notion in the world of real estate that using such a device will somehow be cheaper and easier than doing the “other” kind of conveyance.

Let’s back up a bit. There are two ways that person can give (or “convey”) real property to another: a warranty deed and a quitclaim deed. We commonly abbreviate these as “WD” and “QCD” in the title industry. A warranty deed, unsurprisingly, contains certain warranties made by the seller (the “grantor”) and the buyer (the “grantee”). The language looks something like this:

TO HAVE AND TO HOLD the said tract or parcel of land, with the appurtenances, estate, title and interest thereto belonging to the said GRANTEES, their heirs and assigns, forever, and we do covenant with the said GRANTEES that we are lawfully seized and possessed of said land in fee simple, have good right to convey it, and the same is unencumbered, unless otherwise herein set out, and we do further covenant and bind ourselves, our heirs and representatives, to warrant and forever defend the title to the said land to the said GRANTEES, their heirs and assigns, against the lawful claims of all persons whomsoever.

There are really several warranties contained within this long-winded Middle English paragraph, but we really only need to worry about the one: “to warrant and forever defend the title.” In other words, if the grantee ever runs into title issues, he/she can drag the grantor or his heirs into the lawsuit for having sold a property with bad title.

• What's the history behind this? In days of yore, there was no public record. All property was conveyed by a ceremony, witnessed by neighbors, where the seller literally gave a clump of dirt or a stick from the land to the buyer. If someone later tried to make a claim to the land or disputed the purchase, the buyer could call upon the seller, usually a lord more powerful than the buyer, to "vouch" for him. 
  A quitclaim deed, by contrast, is literally a promise not to make a claim of ownership in the future. It's traditionally used when there is a question of ownership, like when a dead property owner has a long-lost illegitimate child who may or may not hold a fractional interest in the property, or when property passed down through the family without any written records.

Here’s an example: Joe Smith buys a property from Don Jones. Five years later, Joe’s neighbor conducts a survey and finds out that he actually owns Joe Smith's lot due to an error in the record. The neighbor sues Joe. Joe can then bring Don Jones into the suit for having sold him a property with bad title. If Don Jones has title insurance, he can call on his insurance company to protect him.

A quitclaim deed is much simpler (though not any “quicker”!) The grantor simply conveys whatever interest he or she might have in the property, even if none actually exists. If the grantor is wrong about what the grantor actually owns, no harm done. For instance, I could quitclaim the entire state of California to you, but since I own no property in California, you get nothing. By contrast, I do own a little property in Ohio, so if I were to quitclaim you the entire state of Ohio, you’d get whatever property I own in Ohio. If I’m wrong about owning the entire state, you can’t rely on the deed and you can’t drag me into any lawsuits. 

Which one is better? Well, let me try a third time to disabuse you of the notion about quickness: both documents take exactly the same amount of time to sign, notarize and file at the recorder’s office, unless you’ve ticked off the clerks at the office (be nice to them!) Many people assume that the quitclaim deed is “safer” to use because it doesn’t implicate lawsuits or hold you to any promises that you might not have meant to make. These concerns are real, but we as a society have already solved this problem with title insurance. And if you're conveying property into your own LLC, chances are you won't be suing yourself any time soon.

For a deeper discussion of title insurance and warranty deeds, see Why the Quitclaim Deed Might Void Your Title Insurance

The warranties we put in our deeds allows us to tap into the protections we’ve already paid for through title insurance. If it turns out that there are major title issues, we can call up the title company and they’ll defend the case and if necessary buy the house back from us for what we paid for it. It’s the safety net that’s invoked by the warranties.

One of the most wasteful practices, often preached by the get-rich-quick gurus, is to quitclaim all your houses to an LLC or a trust. If we do this, and a title issue pops up, guess who’s getting sued? The LLC. Guess what the title insurance company is liable for? Nada. They’re totally off the hook, because they insured you personally as the property owner, not some other entity. It doesn’t matter if that LLC is your perfect alter ego and you share everything with it, that LLC is not you and the title company will tell you to take a hike.

On the other hand, if you gave warranties to the LLC in your deed (and why wouldn’t you?) then you’d be able to invoke the protections that you’ve already paid for.

So there it is. Use a warranty deed when you can, and only use a quitclaim deed when you don’t know what you have but want to give it away.