Last week, I reviewed the most common types of deeds: grant deeds and quit-claim deeds. In California, deeds are the instruments used to transfer of property from one owner to another. The type of deed you have can affect when and how you can sell your house—so it’s worth understanding what you’ve got.
The types of deeds below are less common. They’re the ones that often make title companies nervous because unlike regular insurance that protects policy holders against potential future problems, title insurance protects people for things that happened in the past. Title companies research the history of a property to make sure that its title (ownership) is clean and that the new owner will, in fact, be the sole and rightful holder of title once the escrow closes.
Usually, when properties change hands it’s a mutually beneficial arrangement agreed to by both buyer and seller, but not always. Sometimes owners are forced to give up their property, and this can make them cranky (and potentially willing to contest the property’s title).
A trustee’s deed is used after a property is sold at auction, in this case, at the culmination of a foreclosure. Foreclosures are usually caused by a property owner’s inability or unwillingness to pay off their loan as prescribed by the terms of the loan, or sometimes when they miss other payments, such as property taxes. This is a lender’s way of protecting their investment. Lenders can also foreclose when a property owner does significant damage to the property (in legal terms, this damage is called “committing waste”). Eventually, the property is sold at a foreclosure auction and the high bidder receives a trustee’s deed.
Let’s say the Smiths sue the Johnsons in court alleging that the Johnsons stole their idea for the next big thing, and the court sides with the Smiths. The Smiths now have a judgement lien against the Johnsons. Because the Johnsons are unable or unwilling to pay the lien, the Smiths may to able to force the Johnsons to sell their property at public auction. The high bidder at the public auction receives a sheriff’s deed.
If a property owner does not pay property taxes, usually over the course of several years, the county can sell the property to pay for the unpaid taxes. The new owner receives a tax deed.
Deed on Death
Finally, with a deed on death, a property owner can choose who to give their property to upon their death using a deed on death. When the owner eventually passes away, the holder of the deed on death becomes the new owner.
Best to Keep Things Friendly
When title is transferred amicably, title companies feel much more confident about insuring the property, which means lenders are more comfortable providing financing. In the case of sheriff’s deeds and trustee’s deeds, if a borrower declares bankruptcy prior to the sale (auction), any deed provided thereafter is void unless it is accompanied by bankruptcy court approval. Sometimes the people holding the auction aren’t notified that bankruptcy has been declared in time to stop the auction, so the high bidder does not, in fact, own the property.
In the case of a tax deed, there are also limitations. Most title companies will not insure a property held by a tax deed until the owner has held it for a year; the reason being, tax collectors don’t do these sales very often and mistakes happen.
Long story short, complex real estate transactions are best handled by a knowledgeable real estate lawyer. If you don’t have a straightforward grant deed, ask your Realtor to refer you to a lawyer who can help you avoid potential pitfalls. If you’d like to discuss these or any other real estate matters, feel free to get in touch. You can reach me at email@example.com or call (707) 462-4000. Dick Selzer is a real estate broker who has been in the business for more than 45 years.