Should I Buy a House with a Special Warranty Deed?

Whether you’re buying your first home or fifth, every homeowner hopes for a smooth and secure transaction. A crucial element of this process is understanding the deed, the legal document that transfers property ownership. While a general warranty deed is the most common and offers broad protection, you might encounter a “special warranty deed” in certain situations. By the end of this article, we hope you’ll be able to answer the question, “Should I buy a house with a special warranty deed?” in a way that works for your homebuying needs.

It’s crucial to understand the difference between these deed types, as a special warranty deed offers a more limited guarantee regarding the property’s title. In this Redfin real estate article, we’ll shed light on what you need to know so that you can make an informed decision before purchasing a home. Now, let’s get started.

What is a special warranty deed?

When you buy a home, one of the most important documents you’ll encounter is the deed. A deed is a legal instrument that transfers ownership of real estate from one party to another. Within the world of deeds, a “warranty” signifies the extent to which the seller guarantees the property’s title. A “special warranty deed” is a specific type of deed that provides a limited warranty against title defects.

Unlike a general warranty deed, which guarantees the title against any claims, past or present, a special warranty deed only guarantees that no title issues arose during the seller’s period of ownership. This means the seller isn’t responsible for problems that existed before they owned the property. This type of deed is also sometimes referred to as a “limited warranty deed.”

Example scenario

Imagine Sarah buys a house from a bank after it went through foreclosure. The bank provides a special warranty deed. Two years later, Sarah discovers there’s an old, unreleased lien on the property from the previous owner, dating back five years before the bank even took possession. 

Because the bank used a special warranty deed, they are not responsible for clearing this lien, as it originated before their ownership. Sarah would now be responsible for resolving this issue herself, highlighting the limited protection offered by this type of deed.

When would you see a special warranty deed?

Special warranty deeds are commonly used in specific real estate transactions where the seller has limited knowledge of the property’s history prior to their ownership. You might encounter a special warranty deed in situations like:

• Foreclosures and bank-owned properties (REO): When a bank sells a foreclosed home, they typically use a special warranty deed. The bank only guarantees that they haven’t encumbered the title during their ownership period. They won’t vouch for issues that occurred before the foreclosure.
• New construction by builders: Homebuilders often use special warranty deeds. They can assure you that they haven’t created any title defects since they acquired the land and built the home. However, they typically won’t guarantee the title for the land’s history before they purchased it.
• Commercial real estate transactions: In some commercial deals, especially those involving large entities, a special warranty deed may be preferred. It limits the seller’s liability to only their period of ownership.

How title insurance can add buyer protections

Despite the limited warranty provided by a special warranty deed, homebuyers can enhance their protection by securing a comprehensive title insurance policy. Title insurance safeguards you against financial losses due to defects in the title that were not discovered during the initial title search.

Should I buy a house with a special warranty deed?

Whether you should buy a house with a special warranty deed depends on your risk tolerance and the specifics of the transaction. For many homebuyers, a general warranty deed offers the highest level of protection, as the seller guarantees the title against all claims, regardless of when they arose. With a special warranty deed, you are taking on more risk for potential title issues from before the current seller’s ownership.

However, opting for a home with a special warranty deed isn’t necessarily a deal-breaker, especially if the property and price are otherwise attractive. The key is to understand the implications and take appropriate precautions to mitigate your risk.

Pros and cons of buying a home with a special warranty deed

Understanding the advantages and disadvantages can help you make an informed decision.

Pros:

• Often associated with potentially good deals: Properties sold with special warranty deeds, such as foreclosures, can sometimes be acquired at a lower price point.
• Clearer liability for the seller: The seller’s liability for title defects is limited to their ownership period, which can simplify transactions for certain sellers.
• Common in specific transaction types: It’s a standard and acceptable deed in situations like bank-owned properties and new construction.

Cons:

• Limited protection for the buyer: You are not protected against title defects that originated before the current seller took ownership. If a prior claim surfaces, you would be responsible for resolving it.
• Potential for hidden risks: Without a full warranty, there’s a greater chance of uncovering undiscovered liens, easements, or other encumbrances from previous owners.
• Requires thorough due diligence: It makes a comprehensive title search and title insurance even more critical to safeguard your investment.

Now, determine if this avenue is right for you

Deciding whether to proceed with buying a home that comes with a special warranty deed requires careful consideration. While these deeds are common in certain scenarios like foreclosures or new construction, they offer less protection than a general warranty deed. Your primary safeguard against title issues, regardless of the deed type, is a thorough title search and a robust title insurance policy. These measures can help uncover potential problems and protect you financially if a hidden defect emerges.