Hey guys, Cody here…
Today I want to introduce you to what’s going to be the start of an ongoing blog series covering some of the most important fundamentals of the real estate game. Some may seem (at first glance) boring and unsexy, but not so (plus anything I am involved in has to be sexy, natch)!
In fact, knowing these concepts is critical and gives you POWER. It’s kind of like learning how to operate a car and knowing the rules of the road before you actually start driving. It’s necessary to have a baseline of knowledge that makes everything else easier and even reveals ‘hidden’ opportunities you didn’t even know existed before.
Title or Deed? Tis the Question
Okay, so let’s start off by covering exactly what owning real estate means to you. I’m going to share the difference between title versus deed – which is a really important concept for brand-new investors to comprehend.
Now, if you purchase some land, you would actually own all of the land on the surface as well as everything down to the center of the earth and upward to infinity. This means that you can own all of the water and the trees and the shrubs and the minerals and the oil and the gas and the air rights (unless otherwise stated specifically in the deed that you don’t own those things).
Now, real estate is defined as land plus any man-made additions that are permanently attached to the earth’s surface (including houses and buildings and apartments and sewers and sidewalks, streets, water rights and mineral rights just to name a few).
Now, this brings us to the concept of real property…
Title (Bundle of Rights)
Real property is defined as land plus real estate plus this little thing called the bundle of rights (REAL property = land + real estate + bundle of rights).
And, that bundle of rights is what we call title. Basically, what you need to know is that when somebody says the word title, what they’re talking about is the rights that an owner of real property has.
Here are some examples of rights included with title (bundle of rights):
- Right of control means you have the right to total control within the framework of the law.
- Right possession means you have the right to have and to hold. The right of quiet and peaceful enjoyment means to use the property however you wish.
- Right of disposition means the right to sell the property, lease the property, barter or destroy the property.
- Right of encumbrance basically means the right to place a lien on the property, to mortgage the property, to grant easement or burden title in some way.
Deed, on the other hand, is the actual physical document, the paperwork used to transfer title from one party to another.
The most common types of real estate deeds are:
General warranty deed offers the most protection.
- It’s guaranteed that there are no hidden liens or encumbrances on the property.
- It guarantees that the seller actually has the right to sell the property. (In other words, it’s guaranteeing that this particular property has clear title or no title defects, not only during your period of ownership but prior periods of ownership going back to the person who owned it before you and the person who owned it before them, all the way back to the property’s point of origin).
- This is the best type of deed to get. So, if you’re ever buying a piece of real property, it’s in your benefit to get a general warranty deed.
Special warranty deed has a little bit less protection. It’s guaranteeing only two things:
- That the seller has legal title; and
- That the property has no hidden liens or encumbrances that aren’t fully disclosed during your period of ownership.
This is the type of deed we typically use as wholesalers when we’re transferring real property from us (the wholesaler) over to the cash back-end buyer. And, it’s basically saying, “Yeah, we have clear title, but we’re only guaranteeing that clear title during our brief period of ownership even if it’s only for a couple of minutes or a couple of seconds in some cases.”
Bargain deed has even less protection.
- There’s basically NO warranties against any form of liens or encumbrances and it’s really only implying that the seller actually holds title and has the right to sell the property.
- This is the most common type of deed in a foreclosure scenario when you’re buying a foreclosure or buying a tax lien sale or something like that.
Quit claim deeds offer the least amount of protection (even less protection than bargain deeds and it basically is only guaranteeing what rights or interests the seller has in the property).
- It’s typically only used to change title between parties if the buyer is confident that there is clear title.
- You want to be very careful if you’re buying a piece of real estate and somebody is trying to offer you a quit claim deed.
- You use a quit claim deed when you actually want to transfer a property between, say, one LLC that you own over to another LLC that you own.
Make sense? Okay, now here’s something really important…
What you really need to understand is that because there are people involved in the transfer of real property, there’s always a chance for a mistake to happen. This is why we care about the type of deed that we give or get.
If there’s ever a problem with the title as a buyer or a seller, the recourse that we may have or not have is going to be dependent upon the type of deed that we have.
Okay, I want you to make sure you have fully digested this material because next time we’re going to build on this by discussing 4 different ways you can take joint title to a property.
So, keep up and really learn this stuff so you can go out and dominate the investing industry!
Until next time…
Keep it real,
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