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Property ownership - a primer

Posted: January 16, 2010 1:50 pm.

How property ownership is obtained.

This is general primer on how ownership is obtained with some key terms and concepts. As with any transaction you should know what you are doing, if you don’t seek the advice of an attorney.

Title – The concept of ownership
Deed – The piece of paper showing and granting title. We will address 4 kinds of deeds.
Warranty deed – This is the best deed for the buyer. The seller guarantees there are no defects in the title, ever. They guaranty this by buying title insurance.
Special warranty deed. This is the next best deed for the buyer. The seller guarantees he or she created there no defects in the title, but does not guaranty the past. It is difficult to get title insurance on this.
Sherriff’s or fiduciary’s deed. This has the same effect as the Special warranty deed. The Sherriff or fiduciary guarantees he or she created there no defects in the title, but does not guaranty the past. It is difficult to get title insurance on this.
Quit claim deed. The least protection for the buyer. The Seller guarantees they will grant all interest they have in the property, if they have any at all! Guarantees nothing!


The first two concepts to understand are “title” and “deed”. Unlike a car where the “title” is a piece of paper, in the real property world “title” is the concept of ownership, not the piece of paper. A person can have title to property without a piece of paper. However, in our complex world we want to be able to show a person has title to real property. The piece of paper we use to show ownership is called a “deed”. Generally, a deed says Seller grants “title” to Buyer. To get “title “and a “deed” the buyer must generally give the Seller money. If the buyer buys with cash the seller will, at closing, grant the buyer “title” and show this with a “deed”.

Note – The promise to pay.
Mortgage – A security instrument. (What the bank can do if the promise to pay is broken.)

The next two concepts are “note” and “mortgage”. Most people will need to borrow money from a bank to buy real property. The bank will want the buyer borrower to sign a “note” or “promise to pay” and will also want some sort of security instrument or recourse if the buyer borrower breaks that promise. The written “promise to pay” is called a “promissory note” or “note” and the “security instrument” the buyer borrower gives the bank (the bank’s recourse if the promise is broken.) is called a “mortgage”.
If the buyer borrower buys with a bank financing the property, at closing, the seller will grant the buyer borrower “title” and show this with a “deed”. It is important to understand the bank does not have “title” or a “deed” or own the property, even if they put the money up for it. They merely have a mortgage on it. (Remember this concept it will come back in the foreclosure articles.)

Priority – the order in which multiple creditors get paid if the property is foreclosed on.

The next important concept is “Priority”. This concept determines who gets paid first if there are multiple mortgages on a property, for instance a first mortgage and a second mortgage. Generally, the note and mortgage that is recorded first is first in priority or first to get paid.
The reasoning behind this is that the second mortgage should have known that there was already a mortgage on the property thus there is higher risk making the second loan. This is why second mortgages often have a higher interest rate than first mortgages.

Example:
On 01-01-08 Dave buys a piece of land from Joe. Dave and Joe agree on a price of $100,000. Dave does not have $100,000 cash but Dave has talked to the bank (Bill and Ted’s excellent bank) and they will loan Dave $100,000. When Dave and Joe “close” on the property Joe will convey “title” to the property and show that Dave has title by giving Dave a “Deed” that says Joe grants Dave title. At this closing Dave will give Bill and Teds excellent bank a “note” (the promise to pay) and a “mortgage” (the security instrument that lets the bank take away the property if Dave breaks his promise.) At this point it is crucial to understand the bank does not own the property they merely have a mortgage on it.

Dave decides he wants to do a little fix up on the property so he takes another mortgage out (a “second mortgage” as it is in second position of priority) with the Loan Shark bank. On 06-06-09 he borrows another $10,000 and gives the Loan Shark bank a” note” and a 2nd “mortgage”.
At this point Dave has ownership (title) of the property, shown by his deed, Joe is in Hawaii with his money thus out of the picture and Dave has promised to pay Bill and Ted’s excellent bank back for the property and further has promised to pay the Loan Shark Bank for the fix up mortgage.

Dave owns the property
Joe has all his money
Bill and Ted’s excellent bank are happy getting payments from the first mortgage
Loan Shark Bank is happy getting payments from the second mortgage.

David W.Houck
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