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.