Article January 11, 2017

Think Twice Before Using A Quit-Claim Deed

If you intend to legally purchase, sell, or even own real property you will need to navigate numerous statutes and regulations. Most of thse rules are written to protect buyers and sellers and their claims to legal title to real estate.

Deeds

Caution: This article focuses on some of the legal problems that may arise if you convey, or accept, real property via a quitclaim deed. This is by no means an exhaustive treatise. You should always consult with an attorney before transferring title to any person or entity. It is important that you ask the right questions so that your conveyance is done properly.

A Basic Review. What Is A Quit-Claim Deed?

In Arizona a quitclaim deed is a document that meets the requirements set forth in A.R.S. § 33-401 & A.R.S. § 33-402. Owners often use quitclaim deeds to transer their real property interests to another. By using a quitclaim deed the owner terminates (“quits”) his or her right and claim to the property. This effectively allows the owners’ claim to transfer to the recipient. This differs from a warranty deed. A seller transfering property using a quitclaim deed does not warrant good title to a piece of real property. Nor does the seller warrant that he or she has a right to sell it. See, e.g., Bender v. Bender, 123 Ariz. 90, at 94, 597 P.2d 993, at 997 (1979)(“In the quit-claim deed situation there is no denial of interest made, but solely the relinquishment (or gift) of any possible interest one has in certain property.)

The most pronounced problem is that quitclaim deeds lack guarantees for creating or delivering good title, unlike warranty deeds, which guarantee that the grantor has good title to the property. Put simply, quitclaim deeds often nullify the certain safeguards built into real estate law. Quitclaim deeds only transfer the ownership rights held by the seller to the buyer. Theoretically you could sell your neighbor’s house using a quitclaim deed, and this might be perfectly legal since the buyer only purchases the rights owned by the seller. Since you do not actually own your neighbor’s property the buyer effectively receives nothing. Of course you would risk huge risks for fraud and other criminal prosecution. But this example illustrates the primary reason why quitclaim deeds are seldom used in a buy/sell transaction involving a mortgage, since the lender has little assurance that the buyer, who is their borrower, receives good, legal title to the property.

In fact, most mortgage loans are sold into the secondary market. With very few exceptions the secondary market refuses to use quitclaim deeds for mortgage purposes. Some of the situations where quitclaim deeds are used for convenience are listed below.

A second problem can exist with quitclaim deeds. Recording a quitclaim deed does not necessarily permit removal of one or more borrowers from any existing mortgages on the transferred property. Mortgage lenders have little interest in removing borrowers from loan obligations. Quitclaim deeds offer lenders a valid reason to disallow the release of any now-former owners from mortgage obligations.

In addition, whether adding or eliminating owners, recording a quitclaim deed may technically violate the terms of the first mortgage loan note. Some mortgage notes expressly state that the loan is in default if the original owners and borrowers are eliminated, or if a new owner who is not a borrower on the first mortgage is added. Depending on local state regulations, this can cause serious legal issues should the lender need to take collection or foreclosure actions.

The easy solution to these problems is to use a warranty deed instead of a quitclaim deed. The reason being that a warranty deed not only conveys ownership but warrants that the title is clear of encumbrances. If an issue arises down the road regarding title, the grantee would have legal recourse against the grantor and the title policy would be in effect to cover the claim.

As noted above, Arizona quit claim deeds are governed by Ariz. Rev. Stat. § 33-401, et al. And we should mention that there is an implied good-faith expectation on the grantor’s part that the property is free from any encumbrances or restrictions. As a practical matter this means that if, after the quit claim deed is executed and recorded, someone else comes forward with a claim of ownership, the grantor is not obligated to defend the grantee’s position.

When to Use A Quitclaim Deed

There are occasions when it is permissible to use a quitclaim deed. However these uses for quitclaim deeds generally do not modify the terms of a first or second mortgage note that already exists on the transferred property.

A quitclaim deed is commonly used in the following situations:

  • In a divorce, when an ex-spouse transfers ownership of the property to the other
  • When a spouse adds the other spouse’s name to the property title after marriage by issuing the spouse a deed
  • If the previous property owner has retained some interest in the property (a quitclaim deed will transfer that interest to the new owner)
  • A person planning a will or a living trust may use the deed to transfer ownership of the property into a trust or to the person they want to inherit the property