Beware Of Sellers Offering Only A Quitclaim Deed

I got a call from a Student asking me if I knew how to help a friend of hers.  The friend had purchased a condo for $35,000 which was well below Fair Market Value (FMV) and seemed to be a good deal.  The seller gave the buyer a quitclaim deed.

A quitclaim deed means the seller “quits” any responsibility for the property including liens, code violations and even personal judgments that might be attached to the property because of something the seller did or didn’t do – like not paying his credit cards, HOA fees and code liens or even a mortgage.

What the buyer didn’t know was that the seller had purchased the deed to the property at a foreclosure auction.  However, the foreclosure auction in this case was not for the mortgage against the property, actually it was for a Homeowners Association’s Lien (HOA) for non-payment of fees and assessments.  Unfortunately, even after the auction, the mortgage remained in place and there remained a danger that the lender could foreclose in the future.

As fate would have it, the lender notified the new owner that they were going ahead with the foreclosure by serving him a lis pendens.  The panicked buyer called the Student and wanted to know what to do to get his money back. The seller no doubt thought that the fact he gave the buyer a quitclaim deed would get him off the hook when the lender foreclosed.  I am sure there was no closing agent involved or the closing agent would have alerted the buyer to the potential loss of his entire investment.

Non-disclosure of a “material defect” in a property to a buyer can be considered fraud especially if it can be proven that the seller knew about the defect.  In this case the seller had to know as he bought the HOA lien at the auction.  I suggested the buyer contact the Attorney General’s Office and file a complaint so a case could be opened against the seller.  It could be that the seller had gotten the deed and intended to rent the unit until the lender foreclosed.  However, he found a gullible and greedy buyer who paid him many months’ rent and a nice profit on his purchase.

The buyer will lose his entire investment and may even be personally mentioned in the foreclosure action as he is now the owner of the property.  His chance of recovery of any of his money is dependent on his tenacity with the state in pursuing the seller.  The seller may have done this other times and the unsuspecting buyers haven’t been foreclosed on yet.  The biggest clue to this travesty is the use of a quitclaim deed to transfer title of the property.

If you are going to bid at a real estate auction you have to do homework on the property well before the auction.  If you are getting a property from an investor seller, you have to pay for a title policy to insure good title so you can sell it later to a buyer who gets conventional financing.  Remember, a quitclaim deed is a huge red flag that something is wrong with the title to the property – not the condition of the structure of the property.

In summary, a seller giving you a quitclaim deed should be considered the same as a person giving you an incurable and very infectious disease and all the while knowing you will be infected and he doesn’t care.

To your limitless success,

Dave Dinkel