Why Quit Claim Deeds Are Like Bad Tattoos

Each month, I receive more than a handful of calls concerning quitclaim deed forms. Usually the callers are not looking to me to obtain the legal forms; they can be easily downloaded online. No, instead, they are usually calling me for legal advice on how to “reverse” or “undo” the real estate transaction that they’ve created, and what has been created is usually a real legal mess.

Quit claimdeeds “gone bad” are like an unsightly or embarrassing tattoo. Reversing the transaction can be painful and expensive and involves a healthy dose of regret.

The “Lowly” Quitclaim Deed

Deeds are the documents that legally transfer property interests. There are a few types of deeds that convey title depending upon your jurisdiction. Among them are: (1) Warranty, (2) Covenant, (3) Trustees, (4) Ladybird, (5) Sheriff, and (6) Quitclaim. This list is not exhaustive, but suffice to say, each type of deed has its own purpose, conveying different ‘guarantees’ of ownership to a grantee. But only the “lowly” quitclaim deed comes without grantor representations or warranties. In essence, a grantor of a quitclaim deed basically says to the grantee, “I may own this property, but I can’t guarantee you that someone else doesn’t have a better claim to it. Oh, and by the way, if someone else does have a more superior interest or claim to the property that I am deeding to you here, don’t expect me to do anything to help in defending your rights to the property”. As a legal document, it sounds pretty useless, doesn’t it? Yet with the proper legal guidance and due diligence, a quitclaim deed can be an effective transfer instrument.

What Can Go Wrong With the Quitclaim Deed?

With access to online legal forms readily accessible to the public, it is easy to forget that with these legal documents comes “great responsibility”. “Practicing” law without the requisite knowledge has consequences, usually financial. Nowhere is this more evident than when “John Public” creates a quitclaim deed. Here are two of the most common problematic scenarios:

• A father deeds his investment property valued at $200,000, to his daughter and her husband using a quitclaim deed. Several years later, his daughter and her husband divorce. The father wants to sell the property. Daughter quitclaims her interest in the property back to him. The now-ex-spouse decides that he wants 50% of the proceeds when the property sells. Father wants the ex-spouse off the deed, but since he was a grantee, that “boat has sailed”. The transaction is over. Now, father and ex-spouse own the property as tenants in common, and short of a legal partition action, there is very little the father can do.
• Same scenario above, but right after the father deeded the property over to his daughter, the IRS put a $50,000 tax lien on the property. When the daughter later deeded the property back to her father, the ex-spouse’s creditor attached a judgment lien in the amount of $100,000 to the property. The $200,000 investment property now has $150,000 worth of liens on it. The liens go with the property. Therefore, when the house sells, the ex-spouse can’t complain about how the father’s earlier $50,000 tax lien on the property is eating into the proceeds, and the father can’t complain about taking back the property with an additional $100,000 judgment lien. They both accepted quit claim deeds.

Better Deed Options

Could the above scenarios happen with other types of deeds, such as a warranty deed or covenant deed? Certainly, they could. But I can assure you that these scenarios don’t occur quite as often when using these types of transfer instruments. Unlike the quitclaim deed, the other deeds come with inherent warranties and remedies available to the grantee.

Conclusion

From my vantage point, if you are using a quitclaim deed as a “quick” form of action, beware! Quitclaim deed forms, which the public frequently calls “quick” claim deeds should come with a ‘cooling off’ period…come to think of it, that wouldn’t be good for business.