What Is a Special Warranty Deed?
A special warranty deed is a deed to real estate where the seller of the property—known as the grantor—warrants only against anything that occurred during their physical ownership. In other words, the grantor doesn't guarantee against any defects in clear title that existed before they took possession of the property.
Special warranty deeds are most commonly used with commercial property transactions. Single-family and other residential property transactions will usually use a general warranty deed. Many mortgage lenders insist upon the use of the general warranty deed.
Special warranty deeds go by many names in different states including covenant deed, grant deed, and limited warranty deed.
- A special warranty deed is a deed in which the seller of a piece of property only warrants against problems or encumbrances in the property title that occurred during his ownership.
- A special warranty deed guarantees two things: The grantor owns, and can sell, the property; and the property incurred no encumbrances during his ownership.
- A special warranty deed is more limited than the more common general warranty deed, which covers the entire history of the property.
Understanding Warranty Deeds
A warranty deed provides the transfer of ownership or title to commercial or residential real estate property and comes with certain guarantees made by the seller. These guarantees include that the property title is being transferred free-and-clear of ownership claims, outstanding liens or mortgages, or other encumbrances by individuals or entities other than the seller.
A special warranty deed—also known as a limited warranty deed—is a variation of the general warranty deed. The general warranty deed is the most common and preferred type of instrument used to transfer real estate titles in the United States.
Both the general and special warranty deeds identify:
- The name of the seller—the grantor
- The name of the buyer—the grantee
- The physical location of the property
- The property is free of debt or encumbrances other than those noted in the deed
- The grantor warrants that they are the rightful owner of the property and have a legal right to transfer the title.
- The grantor warrants that the property is free-and-clear of all liens and that there are no outstanding claims on the property from any creditor using it as collateral.
- There is a guarantee that the title would withstand any third-party claims to ownership of the property.
- The grantor will do whatever is necessary to make good the grantee’s title to the property.
Both deeds provide the same general protections for the buyer. However, the primary difference between a special warranty and a general warranty deed is how they deal with the timeframe of protection given to title ownership.
Special Warranty Deed
While the use of the word "special" may communicate to a buyer the idea that the deed is of higher quality, the special warranty deed is less comprehensive and offers less protection due to the limited timeframe it covers. In residential property, special warranty deeds are frequently used in foreclosures and the forced sale of the property to satisfy a debt.
A general warranty deed covers the property's entire history. It guarantees the property is free-and-clear from defects or encumbrances, no matter when they happened or under whose ownership. The general warranty deed assures the buyer they are obtaining full rights of ownership without valid potential legal issues with the title.
With a special warranty deed, the guarantee covers only the period when the seller held title to the property. Special warranty deeds do not protect against any mistakes in a free-and-clear title that may exist before the seller's ownership. Thus, the grantor of a special warranty deed is only liable for debts, problems, or other encumbrances to the title that they caused or that happened during their ownership of the property. The grantee assumes responsibility for any problems that arise from the previous owners.
As an example, imagine a home has had two previous owners before you. The first owner was a hoarder, and soon the home and yard fell into disrepair. The city's code enforcement department issued fines against the owner which attached to the property. The owner fell behind on their mortgage and the bank foreclosed, selling the home to the second owner.
To the pleasure of the neighborhood, the new owner fixed the house and cleaned the yard. After 10 years they put the home on the market, and you buy it using a special warranty deed. A few years later you decide to sell the home. However, because the code enforcement liens remain against the property, they could encumber your sell. At the very least, you will need to satisfy the city's lien to free the title.
Title Searches and Title Insurance
Most times a title search will uncover any liens or claims to the title of a property. A title search is a review of available public records to determine the ownership of property. Attorneys, title companies, and individuals can complete title searches to verify ownership of property. While these searches are extensive, there is always the possibility that something will be missed.
For this reason, most buyers—regardless of the type of warranty deed they use—also purchase title insurance when buying a property. Title insurance is an indemnity insurance policy that protects a buyer from financial claims against the title of a property that they own.
Special warranties allow the transfer of property title between seller and buyer.
The purchase of title insurance can mitigate the risk of prior claims to the special warranty deed.
Special warranty deeds provide narrow protection for the grantees or buyers.
Special warranty deeds cover only the period of ownership of the grantor or seller.
Although general warranty deeds are more common in residential real estate transactions, there is one area where the special warranty deed becomes the norm. This one arena is for foreclosed properties, real-estate-owned (REO), or short-sold properties.
Most Federal National Mortgage Association (FNMA), Housing and Urban Development (HUD), and bank-owned residences sell using this sort of deed. Perhaps one primary reason for the use of special warranty deeds is because the selling authority has no wish to be liable for any situation concerning the property before the seizure.
For example, in 2012, a couple with a home in Grenada County, Mississippi, defaulted on the loan payments on the property. In February 2013, the property was foreclosed upon by their lender, Wells Fargo Bank. Subsequent legal documents indicated that Wells Fargo "conveyed the Property to FNMA in a special warranty deed."