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If you’re buying a home that’s in foreclosure, you might come across a bargain and sale deed. This type of deed — a legal record that indicates or transfers the ownership of a property — may be used by sellers to indicate that they have little knowledge of the property’s history, and that the buyer could be responsible for liens or other claims against the property. Here’s what to know if you’re interested in a home that has one.
A bargain and sale deed indicates that only the seller of a property holds the title and has the right to transfer ownership. This type of deed offers no guarantees for the buyer against liens or other claims to the property, so the buyer could be responsible for these issues if they turn up.
Bargain and sale deeds are typically used when transferring property in foreclosure or tax sales, explains Eric Maribojoc, executive director of the Center for Real Estate Entrepreneurship at George Mason University in Virginia. That’s because the seller is likely to have little knowledge of the history and status of the property.
“The seller makes no representations with respect to any claims against the property or title defects,” Maribojoc says. “The buyer is accepting the property subject to any existing claims or title defects.”
The seller could choose to make note of an encumbrance, however, Maribojoc adds, such as that there are no outstanding property taxes. In this case, the deed is considered a “bargain and sale deed with covenants.”
Bargain and sale deeds are allowed in a handful of states, including Colorado, New York, Vermont, Washington and Wyoming. “Most buyers of real estate in these states will insist on a bargain and sale deed with covenants,” says Andrew Maguire, a commercial real estate attorney with McCausland Keen & Buckman in Devon, Pennsylvania. “The seller of the property states that it has done nothing to encumber the title to the property being conveyed, except for those encumbrances which are specifically referenced within the deed.”
With a bargain and sale deed with covenants, it’s crucial to understand what or whom the covenants protect — they might only cover what the seller knows about or was directly responsible for, for instance.
A bargain and sale deed implies or infers that the seller has ownership of the property and can transfer its title, and is most common in foreclosure or tax sales. A quitclaim deed doesn’t make that implication or inference, Maribojoc says; rather, this type of deed transfers only the interest the seller has, if any, in the property. It is typically used in transactions among family members, although is not unheard of in foreclosure or tax sales, as well.
Quitclaim deeds can clear a property’s title prior to a sale. If the seller inherited the property from a parent and has siblings, for example, those siblings could have a claim to the property. With a quitclaim deed, the siblings can clear the title, or remove their claims.
Both deeds make no representations as to any claims against the property or title defects. In some states, like Maine and Massachusetts, quitclaim deeds with warrants are the typical instrument for transferring real estate, Maguire says.
There are several other types of property deeds in addition to bargain and sale and quitclaim deeds, including a warranty deed.
A “general” warranty deed is the most protective form of deed, since it indicates that the seller owns the property, has the right to transfer it and warrants against any claims since the beginning of the property’s record, Maribojoc says. In some states, the use of certain terms like “convey and warrants” is an indication of a general warranty deed.
A “special” warranty deed has the same characteristics, except that it generally only warrants against claims arising during the period of ownership of the seller.
“Both of these deeds are used most commonly in property transactions and are of higher quality than bargain and sale or quitclaim deeds, which have limited or no warranties,” Maribojoc says.
It’s important to know what kind of deed is attached to a property. For an investor buying a home with the goal of flipping it, for example, any unresolved issues with the title would add risk to the transaction and could affect their bottom line. Because of this, an all-encompassing deed is key.
“If investors are willing to take on additional risks with a bargain and sale or quitclaim deed when investing in a property involved in a foreclosure or tax sale, [they] should underwrite their projects with a high enough return to compensate for these additional risks,” Maribojoc says.
In addition, investors should ensure the property is financeable by a lender — if not paying all-cash, that is — and insurable by a title company, Maguire says.
Title companies conduct title searches to look for issues and offer insurance to help settle any unresolved claims if they come up. It’s smart to take out an owner’s title insurance policy in addition to the lender’s required policy, since the lender’s policy offers no coverage to the buyer or investor. Note, too, that the type of deed used in the transaction could impact your title insurance premium.
“Buyers should [also] negotiate the form of deed before signing a purchase contract and make sure that their lender and title company approve the form of deed in advance of the closing,” Maguire says.
