Quitclaim Deeds – Are They a Warning Sign of a Bigger Problem?

A growing trend in real estate sales is for sellers to transfer title by using Quitclaim Deeds (a.k.a. QC Deeds).  By way of introduction, this type of deed transfers title from a property owner to a buyer with any “encumbrances” or title deficiencies still attached and completely transferred to the buyer.  These title issues or problems can result in an entire loss of the buyer’s money.

Quitclaim Deeds are often used by adult children who want to transfer title from their parents to themselves.  It is often when the parents are near death.  What’s important is that just because the Quitclaim Deed is properly endorsed, notarized and recorded in the public record does not mean it is a valid deed.  This becomes apparent when the new owners (children of the deceased) go to sell the property.  The closing agent won’t close without having the property probated.

When a property goes through probate and there are numerous beneficiaries, it is common practice for each of the beneficiaries to sign a QC Deed.  This “extinguishes” any future claim a beneficiary may have later such as “seller’s remorse”.  In this situation, Quitclaim Deeds are excellent and are very effective.  The Personal Representative of the Estate will sign a Warranty Deed to the buyer and a title policy will be issued.

While the invalid QC Deed may be a surprise, the real travesty is when the Quitclaim Deed is intentionally used to transfer title to an unsuspecting buyer who is being defrauded.  One of the more common times is when a Homeowners Association (HOA) forecloses on a unit.  The high bidder at the foreclosure sale takes title to the property.  The bidder knows that a mortgage is still in place against the property and that the lender will take the property back by foreclosure.

For example, the owner of a $4,000,000 penthouse condo has not paid his Association fees for a year.  The HOA forecloses.  At the foreclosure auction, a savvy investor buys the property for the $40,000 due to the HOA. This investor is now legally on title and can move into the property.  However, the mortgage against the property has not been satisfied by the HOA foreclosure.  In fact there is $7,000,000 due on the mortgage.  The lender now wants the condo or their money.

When the lender decides that enough is enough, he will foreclose and take title to the property.  The savvy investor has already sold the condo to an unsuspecting buyer.  THe buyer doesn’t understand that the lender can still take the property back.  Sometimes the savvy investor discloses to the buyer that he could lose the property in just days but this seldom deters someone who wants to live in a million dollar condo.

This savvy investor made $35,000 on the sale while the unsuspecting buyer lost all his money ($75,000).  This is an actual case.  The bank proceeded to foreclose 10 days after the starry-eyed buyer had moved in thinking he could stay there for years while not making a mortgage payment.   The deed used to transfer the property from the savvy investor to the buyer is nearly always a QC Deed!  This is not the fault of Quitclaim Deeds but the unscrupulous investor taking advantage of the buyer.  However, the title transfer via a QC Deed is a HUGE red flag that something is wrong.

The other time we see quitclaim deeds used extensively is in the sale of a tax deed property.  Again, the buyer gets a QC Deed from the investor who purchased the property because you have to “work” to get a clear and marketable on a tax deed sale property.  This is because the “chain of title” is clouded by the tax deed sale.  The investor/buyer of the tax deed certificate can go to court.  They file a Quiet Title Action to clear the title which costs money and takes time.  It’s simply easier to find an unsuspecting buyer who will take title via a QC Deed.  The quiet title action seeks to find all other former lien holders and entities previously on title that may not have been properly notified of the tax deed sale.  Those entities and holders are notified of the pending sale and can claim an interest in the property.

Typically lenders come forward once they are notified of the Quiet Title Action and request to get paid the mortgage due.  While the tax deed sale “technically” wiped out the mortgage, lenders can and will fight to get the property or a payoff of their mortgage.  A lot of things can happen if there are objections to the Quiet Title Motion.  Sometimes there are good resolutions and other times there are not.  Once again, the key to heading off this problem is to not accept a QC Deed unless you want to risk a substantial loss of your time and money.

QC Deeds are wonderful if you are transferring the title of a property that can’t otherwise get title insurance, be financed or even be sold because of a clouded title.  Unfortunately, if you are on the receiving end of quitclaim deeds, don’t say I didn’t warn you!  You have substantial time and money at risk with no guarantee of ever getting your money back.

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder