Q: Now that we are into the active house transfer time of year, this column is made up of various questions that I have recently fielded. It may not be the most entertaining column that I have written but is designed to provide foundation information concerning real estate.
A: In a real estate transaction in Colorado, a general warranty deed, a deed of trust, and a title insurance policy are normally involved. But there may be other legal documents mentioned as well. So the following are terms that might be encountered.
There are basically three kinds of deeds – general warranty, special warranty, and quitclaim deeds. Warranty deeds contain promises that the seller makes to the buyer in addition to transferring ownership, such as having good merchantable title, the right to convey, etc. And furthermore, warranty deeds assure that these rights run back through the chain (previous owners) of title so that former owners can be held liable if one of the prior owners caused the presently discovered problem.
Provisions of a special warranty deed vary from state to state, but normally do not contain all of the guarantees of a warranty deed and the promises do not necessarily carry all of the warranties up the chain of title. Special warranty deeds are often given by a legal entity such as a corporation.
A quitclaim deed basically conveys what the seller has with no warranties. If the Seller has nothing, the buyer receives nothing. (Buying the Brooklyn Bridge by accepting a quitclaim deed is probably not a good idea.)
In Colorado, unlike other states, terms such as "grantor’s" deed, "personal representative’s" deed, etc. are descriptive terms, but each is ultimately one of the three types of deeds mentioned above, unless specifically modified by statute.
So much for the documents that convey title. Another set of documents concerns securing loans. If real property is not totally paid for by cash, the amount borrowed will be secured by a document that gives the lender the ability to sell property if payments are in default in order to get back the loaned money.
In Colorado, mortgages are occasionally used, but the instrument of choice is called a deed of trust. Do not mistake a deed (document of conveyance) with a deed of trust (a form of security agreement). Deeds of trust are used because the "foreclosure" system is considered quicker and less expensive as compared to a mortgage foreclosure proceedings. A UCC statement is like a real estate mortgage, but is used to secure payments by encumbering non-real estate items such as the icebox, stove, etc. So those items can also be sold in case of a default through a separate proceeding.
Next, how can a person be sure that there are no problems with the title to the property? First, a buyer can simply take the seller’s word and if later there is a problem, sue the seller, assuming that a general warranty or a special warranty deed was given covering the problem.
Or an attorney can review the chain of title by examining an abstract (legal history book made up of recordings that affect the real property in question) and then give a "title opinion." If a problem pops up that the attorney missed, then the attorney can been sued.
But today, contacting a title company who will issue a title insurance policy is the prevalent method of having the peace of mind that no undisclosed problems exist. If there is a problem not excepted out by the title policy, then the title company covers the loss incurred by the buyer without having to chase previous owners or attorneys.
Folks often become confused with some of the tax terms in buying and selling property. Today an owner can defer up to $250,000 of gain ($500,000 for a couple) every two years from the sale of his or her principal residence. There is no limit on the number of times that a lucky investor can claim this biannual shelter and the money generated does not have to be reinvested into the next principal residence.
For investment property there are two methods to postpone paying taxes. One is called a 1031 Exchange where gain (difference between the current sales price and what was paid for the property) is "rolled over" into the new investment. If the closings cannot be "simultaneous," then a Starker Exchange can be used where the gain is placed in a special account at the first closing, investment property is identified within 45 days of the first closing, and the closing must occur within six months of the first closing. But the property exchanged cannot include an investment property for a principal residence without a reasonable period of time after the exchange goes by before the investment use is changed.
Thus, do not hesitate to ask questions about term definitions (it is your money, after all), but ultimately in Colorado if a title policy is present that covers the usual problems involving real estate, then you can feel comfortable even accepting that quitclaim deed to the Brooklyn Bridge.