What is a Contract Deed?
How to use contract deed formats?
Lately we have been getting quite a good amount of questions from home owners and even real estate agents on what a contract deed is and why is it important when transferring ownership (title) of a home.
Contract deeds are legal documents that which can be drafted by any attorney in accordance with its respective state requirements. By executing a contract deed, a seller of a property is effectively transferring the ownership of the property to the buyer.
Unlike a warranty deed, the contract deed will not provide any guarantees to the buyer that the seller is the true owner of the property being sold. The contract deed is also different from a quitclaim deed in that the contract deed will specify the consideration (the amount of money paid for the property) between the seller and the buyer whereas a quitclaim deed will only transfer the ownership of the property and contain no information as to the respective consideration.
A contract deed is not a known document or instrument in most states , therefore, when seeking to have a contract deed drafted, it is very important that the attorney you select for this purpose is local and familiar with your state’s laws.
If you are transferring ownership of a property, the contract deed must be recorded in the real estate records at your county clerk or recorder’s office. Subsequently, if you sell the property to another buyer, you will need to have another contract deed executed between you and that buyer. A contract deed is not a lasting document and terminating the previous ownership and transferring ownership to a new buyer can only be achieved through the execution of a new contract deed. This process is usually not lengthy and does not incur large fees that a buyer and seller would not otherwise be able to afford.
Components of a Contract Deed Format
Contract deeds are essential documents in real estate transactions through which ownership rights are transferred from one person to another. To ensure that the deed is legally binding and enforceable, certain elements must be present. These crucial elements include the following:
The Parties Involved
The first element of a contract deed is the correct identification of the parties involved in the transaction. The parties are usually the grantor, the grantee and the witness. The grantor is the individual who transfers their rights to another. The grantee is the individual receiving the rights. A witness is required to observe the grantor and the grantee affixing their signatures to the contract deed. After, the witness must sign the contract deed as well. In some states, witnessing is optional but it could affect the admissibility of the document in a court of law.
The Property Address
The property address must be specific enough that exactly which property is being dealt with can be easily determined. In some cases, in addition to the address, the parcel number is added to the contract deed.
The Legal Term
One of the most important elements of a contract deed is what is known as the legal term. This is essentially the contract term that will be used to accurately transfer ownership of the property. The legal term must detail if the property is full fee simple or if it is subject to restrictions and easements. It must also state if the purchase includes improvements, easements and other and if the new owner will have the right to come in and view the property specifically after the purchase.
The Signatures
The signatures of all parties involved including the grantor, the grantee, the witness and a notary, if required per state laws, are the last important element of a contract deed. The deed becomes binding when it is duly signed by all involved parties.
Types of Contract Deeds
Sale Deed
Sale Deed is the most common form of contract deed. It is written to indicate the sale of an asset, either real estate or personal property. In this deed, the seller sells some items or things to the buyer for a consideration. The consideration is written in words as well as numbers. The consideration is not the market value of the asset, it may be of less or more value to the asset.
Lease Deed
Lease Deed is written where the deed holder grants or leases the property for a specific period of time as given in the deed. The deed holder gives the possession or enjoyment of the property to the lessee at a specified rent and the lessor reserves the right to enjoy the property for a specific period of time. The lessor retains the ownership over the property during the lease period.
Gift Deed
Gift Deed is written when the owner of the property offers to transfer his interests or ownership to someone else at no consideration or nominal consideration. The gift shareholder has no right to revoke the gift given to the donee by him. Donor is the one who gives or donates the asset to someone else and the Donee is the person to whom the donor donates the asset.
Loan Deed
Loan Deed grants the lender the legal right to recover the amount taken from the borrower in a situation when the borrower fails to return the amount. It is generally executed in the presence of two witnesses and it provides the rights of the lender over the collateral that will be placed on the asset in case of default in repayment of loan.
Mortgage Deed
Mortgage Deed is written when the owner of the property makes an agreement with the lender to give some share or interest in the property to the lender at the time of default in repayment of loan. The lender can sell the property to recover the amount and has the right to retain the ownership of the property with him till the borrower repay the loan. The transaction of the sale proceeds between the buyer and the seller should be connected with a document by virtue of which the parties intend to create the obligation to pay the purchase money and to transfer the property. The essential requisites for a valid sale of any kind are: Contracts are generally divided into two parts, namely, a part which shows the intention of the parties, i.e., why both parties execute the contract and the second part shows the actual obligations of both parties. There are two types of contracts,—executed contract and executory contract.
How to Write a Contract Deed?
- Decide on the Type of Contract Deed – Warranty Deed, Non-Warranty Deed, Quitclaim Deed, or Special Warranty Deed.
- If you choose a Warranty Deed or a Special Warranty Deed, include the words "grant" and "claim." This may not be necessary if you utilize pre-printed contract deed forms, but it is important information for the person who is eventually going to deliver the deed. The words "grant and claim" basically mean that the grantor will warrant the deed and defend the title against all persons. This means that if someone comes into possession of the real estate and wants to kick out the grantee, then the grantor will stand behind the grantee and help him or her keep that property free from any outside claims. Those two words are not necessary for a Non-Warranty Deed – because a non warranty deed states that the seller only sells whatever interest he/she possesses. So, if I only own 99% of the property, then that’s all the Non-Warranty Deed conveys.
- Describe the property carefully. Someone who sells their property is known in legal terms as a grantor. Someone who buys the property is also known as the grantee. Both the grantee and the grantor should have full identifying names and dates of birth and social security numbers. In Georgia, we also need full legal names and addresses of new owners and addresses of the sellers. We also need full Marital Status. We also need a legal description of the property, an address for the real estate, and a plat reference. If you own something called an exclusive use easement, then that is a right to privately use a particular area of common property. It is suggested that you include the parcel number where the exclusive use easement exists, along with a survey, or reference to the plat which contains your easement’s location. On the Exclusive Use Easement, the owners of the unit must include the owners of any other units which will be sharing the easement. These owners should be obliged to contribute towards the cost of maintaining the exclusive easement and should continue to hold ownership of that easement as long as they own the unit within the community.
- Next, make sure the two parties sign the deed. You may wish to take the persons’ signings to a notary public, just to ensure that the signatures were actually present and not forged. Make sure you or your agent fill in the grantee’s name and then sign and date the deed. Then you would either send the deed to the grantor and have him or her sign it and date it. Or, you could wait until it is convenient for both parties, and both parties can meet at the same time to sign. It is important that the grantor and grantee sign the deed in the presence of notary publics. There are some instances (such as mortgages and deeds of trust) where the deed is not delivered to the grantee, but held by the mortgagee, transferee or promisee until certain conditions are met. These conditions include full payment of the purchase money and any required prepayment of taxes which are due. If the persons or agents fail to have their signatures notarized, many states will not accept the deed for filing and recording. So, the best practice is to always have the signers’ signatures notarized.
Mistakes often seen in Contract Deeds
Frequently, attorneys (or even worse, non-attorneys) attempt to draft legal documents without understanding the legal concepts behind those documents. I have seen many mistakes on contract deeds and I would like to point out some common ones. Chief among the mistakes is failing to use the proper legal description of the property. The legal description should be a current and complete metes and bounds description of the property in question. In addition, if there have been any recent surveys or any easements recorded or established the contract should reference those. These mistakes, while common and often overlooked, can actually deprive the seller the ability to enforce the contract deed should the contract not be honored and foreclosure is required. Other mistakes include the use of complex sentence construction . A well written contract deed will be easy to understand and will not require lengthy paragraphs or complicated language. I have even seen contract deeds with paragraphs that ran for pages including additional clauses and paragraphs that were poorly constructed and difficult to follow. More importantly, vague or poor terms can make enforcement difficult or impossible without extensive litigation. This will take time and most importantly money. Failure to properly sign and notarize the contract deed is also a common mistake. The contract deed must be signed by all parties in front of a notary. This forms the legal basis of the contract and allows the document to be legally filed. Failure to properly sign and notarize can render the contract voidable by either side. It is well worth the small costs involved to get the contract deed prepared properly and make sure it will protect you should default occur.
Checking and Signing of Contract Deeds
When reviewing a contract deed, you want to make sure that the name of the grantor(s) that is granting or conveying the property being sold to the buyer is the same as they are listed on the deed. You also need to make sure that the legal description of the property is correct and matches the property that is being conveyed. It is important for the deed to have both the tax parcel number and street address.
The deed must be proper and executed correctly in front of either a notary or a witness for it to be valid. The original deed (the one that is recorded with the Recorder’s Office) must be in blue ink. However, copies of the deed that are circulated earlier usually have the signatures in black. These copies are still valid because the only one that actually affects the property legally is the original deed which is recorded either with the Register of Deeds or with the Recorder of Deeds. This is where the process can become problematic for the buyer who wants to see the original deed before closing. Some sellers refuse to show it because they are afraid that the buyer may try to record it before closing. As a result, the deed will convey the house to the buyer before closing even takes place and the sellers will end up without the money from closing and may have to go through a long lawsuit to recover it.
Consequences of Wrong Contract Deed Formats
Legal implications exist for not using the proper Contract Deed format for the particular type of transaction. When a company uses the incorrect Contract Deed it is taking unnecessary risk by failing to comply with applicable State standards and requirements. Most important though is the fact that when it comes to liens, Courts will look at how the lien is attached to the property. If the lien was attached to the property via a lien that does not name the entity and party who did the work, then the lien is null and void. Practically speaking this means eliminating the possibility of collecting on the lien. It also means suffering the fees and costs of defending a Validity Action so to register a new lien. Compensation for the work can be delayed and in some cases there is no way to get paid.
A Contract Deed failing to name the correct owner of the property or a Contract Deed failing to contain the proper legal description may be challenged if the owner or subsequent purchaser wishes to challenge the Contract Deed given the failure to comply with the requirements of the laws of the State as they relate to Real Estate Transactions .
The Deed needs to contain the proper Statutory language to be valid and to put the public on notice as to the chain of title of an interest in Land. A Contract Deed "Deeds" the interest in the property to the purchaser/contractor until such time as the terms and conditions of the contract between the parties is fully performed. Typically the Contract Deed (if it is a Deed of Trust or Third Party Mortgage) provides that the purchaser/contractor will obtain full title to the property after the debt is paid off. In some cases the Contract Deed is a Legal Subcontractor Lien. The importance of the correct contract Deed cannot be understated. There are no short cuts. When a contract deed is used for the wrong transaction it can cause serious legal challenges when a party seeks to enforce a right created by the Deed. The Contract Deed must only be used for the transaction for which it is created.