The Disadvantages of a Quit Claim

The Disadvantages of a Quit Claim
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Quit claim deeds clear up real estate title issues. If someone's on the chain of title that shouldn't be, a quit claim removes them. In addition, property owners sometimes use quit claim deeds to move a property's ownership into a different entity. For instance, you might quit claim your house into your family trust or quit claim a rental property into a limited liability company that holds your investments. Quit claim deeds might be easy to use, but they aren't perfect tools.

Giving Up Rights

When you sign a quit claim deed, you give up any rights you have to a piece of property. If you know that you want to give it up -- like when you quit claim the property to your own entity like a trust or a limited liability company that you own -- or if you know that you're not supposed to be on title for a property, this isn't a problem. However, if you're not sure what your rights are, you could consider looking into why you're quit claiming the property before signing anything.

Unclear Value of Deed

If you buy a property and the seller offers you a quit claim deed, be very careful. When you accept a quit claim deed, you're accepting the seller's rights to the property even though the seller doesn't promise that he has any. This is an important distinction -- in a warranty deed, the seller guarantees that he owns the property that he's giving to you. With a quit claim deed, there are no promises. In fact, you could legally quit claim your favorite hotel to a friend. It'd be like giving her a lottery ticket that you already scratched off and know to be worthless. As such, buying properties on a quit claim is a very dangerous business.

Title Insurance Issues

When you use quit claim deeds to move property around for yourself, you run the risk of invalidating your title insurance coverage. Title insurance protects your ownership of the property and will step in if, for instance, a previous owner that never quit claimed her interest appears. However, when you quit claim a property to an entity that you own, you create a new owner -- the entity -- that isn't covered by the title insurance.

Deed in Lieu Walkaways

If you owe more than your house is worth and you're having trouble paying your mortgage, you might be tempted to quit claim your property to your lender and let them take it over. The problem with doing this is that simply giving your property to the lender doesn't release you from responsibility for your loan. It could take your property, sell it and then come after you for anything that's left over. Instead of just quit claiming your property to the lender and walking away, negotiate a deed-in-lieu-of-foreclosure transaction where the bank accepts your quit claim deed and agrees, in writing, not to pursue you.