When transferring real estate, there are several different property deed types to choose from, with the most popular being Quit Claim Deeds, Grant Deeds, and Warranty Deeds. Unfortunately, too many real estate investors opt for Quit Claim option most likely due to its common parlance amongst investors when discussing the transfer of real estate.
A client just felt the pain of using a Quit Claim Deed when selling a property he owned for five years. His situation set up as follows:
- Jim buys a house in his own name with title insurance
- Jim attends a seminar and learns about asset protection and the benefits of LLCs
- Jim hires a local attorney to create an LLC and deed the property into the LLC
- Jim’s attorney prepares a Quit Claim Deed and transfer the property into the LLC
FIVE YEARS LATER
- Jim’s LLC sells the house for $130,000
- Escrow holds on to $120,000 and refuses to pay it over to Jim’s LLC because of a HELOC from the prior owner clouding title
- Jim contacts his title company to bring a claim
- Title company informs Jim it missed the HELOC when he purchased the property but Jim blew his policy upon transferring it into his LLC i.e., WE WON’T PAY!
You probably guessed where Jim went wrong – using a Quit Claim Deed. Title insurance protects you from any defects or claims brought against you at a later date in connection with a title defect. The key to staying protected when deeding property into an LLC is to ensure claims can still be brought against you. You are probably thinking why would I want claims to still be brought against me? The purpose of the LLC is to protect me from claims. Well, we are not referring to lawsuits with third parties. In this context, you will be suing yourself. Sounds crazy but in reality that is what Jim could do if he had used the proper deed form.
A Quit Claim Deed transfers bare legal title to the grantee without any warranties of any sort. Think of it like the “AS IS” clause in a real estate purchase and sale agreement. A Warranty Deed on the other hand guarantees free and clear title of any defects. When Jim’s LLC did not get paid on the sale of the property it could not bring a claim against Jim for transferring defective title because the type of deed he used (a Quit Claim) came without any warranties. A Warranty Deed solves this dilemma because Jim’s LLC could sue Jim under his warranty of clear title. Jim, in turn, will give the claim over to his title insurance company who agreed to insure Jim against any claims for a defective or clouded title.
Jim discovered it is sometimes the small things that end up generating the biggest problems.