What Is a Quit Claim Deed?
Deeds are legal instruments in writing used to transfer real estate between parties. There are a few different types of deeds, each with their own purpose in the legal world. The difference between each type of deed is measured in how it deals with the types of warranties the grantor is making to the grantee—that is, the party selling or transferring ownership of the property and the party buying or otherwise receiving ownership of the property, respectively. So, what distinguishes a quit claim deed from other types of deeds?
What Is a Quit Claim Deed?
A quit claim deed, unlike other property deed types, offers no warranty for the grantee, or buyer, and thus no protection. With a quit claim deed, the grantor is essentially “quitting” their claim to the property by giving the grantee all their ownership interest. Of course, this means that if the grantor never had proper ownership of the property to begin with, then the grantee receives nothing.
That may sound risky, and you might ask why anyone would use a quit claim deed. In fact, there are some good reasons and ideal situations for using a quit claim deed. Let’s explore.
First, it’s important to note that there are numerous situations in which the grantee may not need or care about warranties. For example, when a strong bond of trust already exists between the parties (such as a transfer between members of a family) there is little to zero need for a warranty. The grantor may want to put their property into a trust or transfer ownership to a sibling. A divorcing couple may need to easily divide property after a divorce. A business may wish to transfer property to a subsidiary. In situations like this, the most efficient deed is the most optimal choice.
Transferring to a Subsidiary
The reason quit claim deeds are a great tool for property transfers to business subsidiaries – and the reverse, from subsidiaries to parent companies – is because it is assumed here that the parties come to the deal with existing trust. A subsidiary would not sue its parent company, and vice versa. So in this case, the relative ease of drafting, serving, and filing a quit claim deed makes it the ideal vehicle for handling these types of transactions.
Removing Title Defects
There are more specific reasons for using a quit claim deed. One of the most common reasons is to remove title defects on a property. These title defects, often called “clouds,” arise when a title search reveals that a property was not properly transferred in the past. It could be the result of a previous owner failing to follow the proper legal requirements for the deed. A “cloud” may also be present in the event that a grantor transferred property without spousal consent, and that spouse also had an interest in the property. In a case like this, the grantor may ask the spouse who still holds possible interest to execute a quit claim deed in order to relinquish all right to the property that they may have.
With the title defect removed, property transfer can occur without issue in the future.
Mortgages Are Unaffected
Because they’re usually used with property that is not being sold, but transferred between parties, quit claim deeds aren’t often utilized for properties with an existing mortgage. In the event that a property does have an existing mortgage, the grantee would usually insist on receiving the warranties from the grantor that come along with a general warranty deed.
Despite this fact, quit claim deeds are sometimes used to transfer property that has an existing mortgage. Crucially, in these situations, the quit claim deed does not affect the mortgage at all. What this means is that whoever the mortgage names as the responsible party must continue to repay it unless the new property owner assumes responsibility for payments by signing a separate mortgage assumption agreement. Absent that, the mortgage sails along unaffected by the property transfer in a quit claim deed.
What About Land Contracts and Quit Claim Deeds?
Sometimes quit claim deeds transfer property after a land contract sale has been completed, i.e. the final payment has been made and all other obligations under the contract have been met. Sometimes, inexperienced land contact sellers mistakenly give the buyer a quit claim deed after they sign the original contract–not at the end, after all obligations have been met. However, when possible, execution of a warranty deed should happen at the end of a land contract. The importance of this decision depends on which side of the deal you’re on–buyer or seller.
Land contracts are also known as contracts for deed, meaning that the deed does not transfer until the contract is fulfilled. This is distinctly different from a typical mortgage contract, where the buyer gets a warranty deed along with the mortgage at closing. If an owner of a property provides a promissory note and mortgage, this transaction is a purchase money mortgage – where the seller is acting as the bank. See more about purchase money mortgages here.
About Risk: Does a Quit Claim Deed Affect Future Sale Transactions?
Buyers might be leery of a quit claim deed because, as we learned above, there is no proof that the seller actually owns title to the property. A long history of quit claim deeds on a property might make it difficult to get a warranty deed needed by a future buyer in order to get a mortgage. In other words, you’ll want to use the quit claim deed sparingly, and only in the appropriate situations.
Other Types of Deeds
We covered the idea of what a deed is, and what makes a quit claim deed unique. So, what are some other types of deeds commonly used in Michigan?
This type of deed, unlike the quit claim, comes with a warranty from the grantor to the grantee, ensuring no surprises in the title. This means that no one else may claim an interest in the property and that the grantor has full legal authority to sell the property. Additionally, the grantor is liable to the grantee for any problems with the title.
Special warranties come with a partial, rather than full, guarantee. In this case, the grantor guarantees that they have not transferred interest in the property in the time they have owned it, and that there will be no hidden claims coming out of their ownership. Importantly, the special warranty does not carry any guarantee about what may have happened before the grantor owned the property.
In Michigan, the warranty deed provides for an unlimited warranty of a property’s title. It makes an absolute guarantee that the grantor has good title to the property, covering not only the time that the current owner has possessed the property, but all time prior. This means that the grantor can be held legally responsible for any title issues that arose before they acquired the property. This type of deed is often used when, for example, a buyer is purchasing residential property at full value, when the buyer does not intend to purchase title insurance, or any other circumstance where the grantor is confident and comfortable with the legal risk associated with the unlimited warranty.
This type of deed grants ownership rights to property purchased at a sheriff’s sale – which is a sale conducted by the sheriff upon order of a court following a failure to pay a judgment. This often happens with property involved in a mortgage foreclosure. When the mortgage holder becomes delinquent in payments, the lender may force a public sale of the property. At this point, an auction is publicly advertised and then held by the local sheriff. The highest bidder at the auction receives the title to the property via sheriff’s deed. Note that, in such a case, the debtor has the right of redemption of the property right up until confirmation of sale is signed by the judge and filed by the court.
It’s important to know the distinction between the types of deeds and to know not only how they work, but what situations use them. With this information readily at hand, you’ll approach any real estate transfer properly equipped to navigate the legal landscape and come out on top.
Disclosure: This Knowledge Base article is accurate as of the last update. Laws and policies are subject to change. If you have any questions, please call the office. Click here for contact information.