Purchasing a large, complex commercial property is not the same as purchasing an item from a store. The transaction can be incredibly complex and it often requires a team of lawyers, paralegals, lenders, and title agents to complete successfully.
Two of the most important documents in the exchange of ownership are the property deed and the property title. They are commonly confused for each other, but they are distinctly different. The purpose of this article is to highlight the differences of a deed vs. title and why they are important for investing in commercial real estate.
What is a Property Title?
A commercial real estate title is a document that grants the owner the right to use it. The title can grant full or partial use of the property and it can also provide the holder with the right to transfer it from one party to another. In fact, a property title grants the holder a series or “bundle” of rights. They include:
- The Right of Possession: States that the title holder is the legal owner of the property
- The Right of Control: The title holder has the right to use the property in any way that they wish so long as it is not illegal.
- The Right of Exclusion: Allows the title holder to limit who can enter the property. It should be noted that the right of exclusion does not apply to utility easements or search warrants.
- The Right of Enjoyment: Allows the title holder to enjoy the property in any way that they see fit so long as it is not illegal.
- The Right of Disposition: Provides the title holder with the right to transfer ownership – temporarily or permanently – to another party. It should be noted that the right to transfer or “dispose” of a property may be limited by the existence of liens due to a mortgage or unpaid bills.
Given their size, complexity, and ownership history, the issue of who has title ownership rights to a particular property is not always as clear cut as it seems.
The Role of the Title Search and Title Insurance
To confirm that a property’s title is free and clear of any competing claims, one of the first activities in the closing process is to perform a title search. In it, the title company performs detailed research using public databases, government records, and legal documents to see if there are any liens or encumbrances that could potentially prevent a transfer of title to the new owner.
To protect against competing title claims, many investors purchase one of two types of title insurance. An investor/borrower can purchase a lender’s title insurance policy to protect the lender against issues with the property’s title. The other type is owner’s title insurance, which is often paid for by the current property owner to protect the buyer’s equity in the transaction.
A basic title insurance policy protects against the following (potential) issues:
- Ownership of the property by another party
- Incorrect signatures on documents, including forgery and fraud
- Incorrect public records
- Encumbrances or other judgements and liens that could prevent the transmission of a clear title to the property.
If any of these issues occur, the insurance holder can file a claim to recoup any financial losses as a result of the competing title claim.
What is a Deed?
A property deed is the legal document that transfers the property’s title from one party to another. Depending on the type of transaction and the state in which it occurs, there are up to six different types of deeds:
- Quitclaim Deed: A type of deed used to transfer property ownership between familiar parties like family members or divorced spouses. This type of deed offers little legal protection to the grantee. For example, if it turns out the grantor does not legally own the property, the grantee does not have any legal recourse.
- Deed of Trust: A type of deed that transfers ownership of a property from a trustor to a trustee for the benefit of a third party beneficiary. In certain states, a deed of trust is used instead of a mortgage to act as security against a loan that has been transferred to a trustee. This is particularly common in residential real estate transactions.
- Warranty Deed: A type of deed that offers special legal protections to the grantor in case there is an issue with the title after it has been transferred. Specifically, there are two types of warranty deeds: the General Warranty Deed – which is used in residential real estate transactions and guarantees that the seller has the legal right to sell the property – and the Special Warranty Deed which protects the grantee from issues during the time the grantor owned the property entirely.
- Grant Deed: A type of deed that transfers interest in a property from the seller to the buyer in exchange for a previously agreed upon price.
- Bargain and Sale Deed: Typically used in residential real estate transactions, this type of deed simply states that the grantor is the title-holder to the property. There are few legal protections with this type.
- Mortgage Deed: Another document used in a residential transaction. It is typically executed between a homeowner and a lender and it allows the lender to place a lien on the property in the event the loan is not repaid.
Granted, not all of these deed types are used in a commercial real estate transaction, but it is helpful to know the specifics of each type and how they are used.
What Steps Does FNRP Take To Ensure Property Ownership is Transferred Without Issue?
When we purchase a property with investor money, we have a fiduciary duty to ensure it is protected. With regard to potential title issues, we rely upon three things to protect our investors (and ourselves) in the transaction:
- Our Experience: Between our management and acquisitions teams, we have completed hundreds of commercial real estate transactions and have encountered all varieties of issues and their solutions. We leverage this experience to proactively spot issues and address them before they become problematic.
- Third Party Experts: In addition to our own team, we utilize highly experienced outside experts like lawyers, title agents, insurance agents, and paralegals to review documentation and ensure that there are no potential title or deed issues.
- Our Process: Through our experience, we have developed a thorough and detailed checklist process and we use it in every transaction to make sure there are no issues.
Conclusions & Summary
There is an easy way to remember the differences between a title vs. deed in real estate. A title grants the holder ownership rights to a property while the deed is a physical legal document that transfers ownership from one party to another.
To protect against financial loss from title defects, it is necessary to purchase title insurance with a qualified title insurance provider. Prior to issuing the title insurance policy, the provider will perform a title search to ensure there are no title related defects.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
