Category: Real Estate

What Is the Effect of an Unrecorded Deed?

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A deed is a legal document used to transfer real property ownership rights from one person or entity (the grantor) to another (the grantee). In many cases, this transfer occurs due to the property being sold, with the seller transferring the property to the buyer. Typically, a deed is recorded with the local county recorder of deeds. Recording the deed gives the public notice that the grantee now legally owns the property. 

Not recording a deed can cause problems for the grantee. They may be unable to obtain a mortgage, insure the property, or sell it. Even more problematic, an unrecorded deed may make it possible for the grantor to sell the property to a buyer and subsequently sell the same property to a different buyer. This could result in the property being sold out from under the original buyer who failed to record the deed. 

Whether this last scenario is legally permissible depends on state laws that determine which party prevails when there are conflicting ownership claims to a property. 

Title versus Deed

A deed is a document that confers property ownership rights associated with title to a property. Both the deed and title to the property transfer from the grantor to the grantee when real estate is conveyed. But a title and a deed are not the same thing. 

Title refers to a property owner’s legal rights, such as the right of possession, the right of control, and the right of disposition. Title is not a document—it is a legal right of ownership. 

The deed, on the other hand, is a physical document that transfers ownership of property from the grantor to a grantee. It contains a legal description of the property and the names of the grantor and grantee. To make a property transfer official, the grantor must sign the deed, and the deed must be delivered to and accepted by the grantee. At the time of the conveyance or purchase, the deed and the title transfer from the grantor to the grantee. 

If this sounds confusing, Quicken Loans provides a helpful metaphor: a property title is like a book title, while a deed is like a physical book. You can hold the book/deed in your hand, but property title and a book title are concepts—not tangible items.1 

Recording the Deed

The grantee is responsible for recording the property deed under state law. Deeds should be recorded in the appropriate government office as soon as possible after the property is purchased by or conveyed to a new owner. 

Recording a deed makes it a public document and provides de facto notice to third parties that the grantee owns the property. If the deed is not recorded, the party holding the deed may not be recognized under the law as the legal property owner to third parties, though the deed may be legally effective to transfer the property from the grantor to the grantee. 

If a deed is not recorded, it is virtually impossible for the public to know that a property transfer occurred, and the legal owner of the property could appear to be the prior owner rather than the new grantee. This could present numerous problems. For example, a lender could deny a mortgage application if a property deed is not recorded in the new owner’s name. 

Not filing a deed could also raise a bigger issue. In the absence of a public record of the deed, the grantor could transfer the property a second time to a different grantee. A subsequent buyer who did not have notice of the prior transfer may have a stronger ownership claim than the person who holds the title but did not record the deed. 

Bona Fide Purchasers and Conflicting Property Claims

Arguably the strongest argument for recording a property deed is that, in most states, it eliminates the possibility of a subsequent sale of the same property to a bona fide purchaser. 

A bona fide purchaser is a buyer who purchases a property for a reasonable amount with no reason to believe that it belongs to another person or is subject to another party’s claim. In the context of this article, a bona fide purchaser could emerge if the property’s owner conveys the same property to two or more buyers, and the first buyer failed to record their deed. 

Remember, if a buyer does not record their deed, they are not publicly recognized as the property owner. Therefore, if the first buyer does not record their deed and a second conveyance of the same property occurs, the second buyer could be declared the rightful property owner as long as they record their deed before the first buyer. 

Jurisdictions differ on how they deal with conflicting property claims. They can be divided into three different types:2 

  • Notice jurisdictions allow a subsequent bona fide purchaser to prevail over an earlier buyer if the bona fide purchaser did not know about the previous transfer and the earlier buyer failed to record the deed. In a notice jurisdiction, recording a deed eliminates the risk of there being a subsequent bona fide purchaser, because all buyers have a responsibility to perform a title search that would reveal a previous property sale. If the deed has been recorded, any claim that a second purchaser was unaware of the initial sale would therefore be due to their own negligence, disqualifying them as a bona fide purchaser. 
  • Race-notice jurisdictions allow a subsequent bona fide purchaser to prevail over the first purchaser only if the bona fide purchaser records their deed before the first purchaser. The purchaser who records their deed first is recognized as the legal property owner. Thus, it is a “race” between the two buyers to record their deed—but the subsequent bona fide purchaser is only allowed to compete in the race if they did not know about the earlier property transfer (i.e., they did not have notice). By the way, Indiana is a “race-notice” jurisdiction.
  • Race jurisdictions do not consider whether a second purchaser had notice of the earlier purchase. That is, the second purchaser does not have to be a bona fide purchaser. It is a pure race between the two parties to record their deed first, even if the second purchaser knows that an earlier unrecorded conveyance has taken place. Race jurisdictions are uncommon. 

Know the Law of Deeds Where You Live or Purchase Property

As stated above, Indiana is a “race-notice” jurisdiction. But, our clients may be purchasing property outside of Indiana. The buyer’s or grantee’s title or escrow agent is typically responsible for filing the property deed at the local records office when a real estate purchase or conveyance closes. Therefore, it is advisable that all grantees use a title or escrow company. Grantees who do not record their deed themselves should request a copy of the recording page from their agent or local government office. 

An unrecorded deed can pose significant problems—including the problem of conflicting ownership claims—and it should be recorded as soon as possible. Earlier buyers that lose out to a subsequent buyer may be able to sue the seller and recover the purchase money. To discuss a deed or title issue, contact our office and schedule an appointment.

Footnotes

  1. Patrick Chism, Deed vs. Title, What’s The Difference?, Quicken Loans (Nov. 16, 2020), https://www.quickenloans.com/learn/deed-vs-title.
  2. Notice and Race-Notice Jurisdictions, LawShelf, https://lawshelf.com/coursewarecontentview/notice-and-race-notice-jurisdictions (last visited Dec. 21, 2022).
Vacation Property

Important Questions to Ask When Investing in a Vacation Property

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According to the National Association of Home Builders, in 2018 there were approximately 7.5 million second homes, making up 5.5 percent of the total number of homes.1 These homes are not only real estate that must be planned for, managed, and maintained, they are also the birthplace of happy memories for you and your loved ones. Following are some important estate planning questions to consider to ensure that your place of happy memories is protected.

What Will Happen to the Property at Your Death?

The fate of your vacation property at your death largely depends on how it is currently owned. If you are the property’s sole owner or if you own it as a tenant in common with one or more other people, you need to decide what will happen to your interest in the property. If you own the property with another person as joint tenants with rights of survivorship or with a spouse as tenants by the entirety, your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation property, the entity will continue to own the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death. 

What Do You Want to Happen to the Property at Your Death?

The wonderful thing about proactively creating an estate plan is that you get to choose, in a legally binding way, what happens to your money and property. It is important to note that, if you do not create a plan for your property (and if it is not owned in joint tenancy with right of survivorship or tenancy by the entirety), your state will decide for you according to its laws and by putting your loved ones through the probate process. Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. It is also important to note that owning property in a different state from where you reside could lead to your loved ones having to open two probates (one in the state where you resided at death and one where the vacation property is located). There are several different options for handling your vacation property.

  • Give the property outright to a loved one. This person may be your oldest child, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.
  • Leave the property outright to a group of people. Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.
  • Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own property interest and personal financial situations, an ownership agreement can lay out each one’s rights and responsibilities.
  • Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property’s owner when you die, the beneficiaries will merely look to the trust to see what happens. There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Note: State law may limit how long the trust can remain in effect (the rule against perpetuities). If you want the trust to hold the property indefinitely, speak with an experienced estate planning attorney about how to accomplish this goal.
  • Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and property to be managed on its own or if you have asset protection concerns. This trust agreement would also lay out each beneficiary’s specific rights and responsibilities with respect to their use and enjoyment of the property.
  • Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property. 
  • Instruct your trusted decision maker who will wind up your affairs to sell the property. If you believe that the money from the property’s sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling it can be an effective way to provide some money to benefit your loved ones differently.

Can Your Beneficiary Afford the Vacation Property?

While there may be a lot of happy memories associated with your vacation property, you know that there are also a lot of responsibilities. When you decide to leave your property outright to a person or group of people, they will become responsible for financial obligations such as mortgage payments (if any), utility bills, and property insurance and taxes. If you wish your beneficiary to keep the property, you need to consider whether they can meet the financial obligations; if not, they may end up prematurely selling it.

If More than One Person Will Have an Interest in the Property, Do They All Get Along?

All your children may get along now, but will they still be able to come together and see eye to eye when you are no longer living? Owning property together means that they need to be able to communicate, agree, and equally contribute to the property’s maintenance. A proper estate plan can address these potential issues by outlining

  • everyone’s responsibilities with respect to the property,
  • everyone’s rights to the property,
  • who makes the decisions,
  • what to do if a dispute arises, and
  • how someone can walk away from the property.

What Should You Do to Make Your Wish a Reality?

First, you need to legally document your wishes to ensure that your loved ones know what your wishes are, that they will be followed, and that all possible scenarios have been planned for. Second, if you have concerns about your beneficiaries being able to financially maintain the property, you need to meet with a financial advisor to design a plan that allows you to set aside money for its maintenance. Also, you need to meet with an insurance agent to make sure that the property is properly insured based on its intended use and to acquire additional life insurance in case you need another source of financial liquidity for its maintenance. Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.

If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact us.

Footnotes

  1. Na Zhao, Nation’s Stock of Second Homes, National Assoc. of Home Builders Discusses Economics and Housing Policy, Eye on Housing (Oct. 16, 2020), https://eyeonhousing.org/2020/10/nations-stock-of-second-homes-2/).