Here is the fourth post in our series drawing on appraisal concepts from our unpublished easy-to-digest BPO course content. This series showcases the fundamental real estate knowledge needed by a DRE licensee to competently develop a Broker Price Opinion (BPO) prepared for a client. We start with defining property and conveyancing of property rights.
Why this article matters to your practice: Property pricing maxed out in early 2022, following a very long cycle of buyers and tenants chasing the rising price of property rights, such as possession, since mid-2009. Concern for an evaluation was dropped from the price-setting conversations during this period of booms. That has changed. Rational judgment – caution, but not yet understanding – has returned for most all prospective buyers and tenants. And with it, brokerage services, and the necessity of a comparable market analysis (CMA) – the professionally produced BPO, aka Appraisal.
Acquiring interests in real estate
Two types of deeds are used nearly exclusively to convey a real estate interest other than a leasehold or security interest:
- grant deeds; and
- quitclaim deeds.
Often, grant deeds and quitclaim deeds are erroneously viewed as interchangeable; occasionally a grant deed creates unintended liability exposure for grantors. Other documents used to convey security, ownership or possessory interests in real estate are:
- trustee’s deed, conveying ownership on a trustee’s sale; [See RPI Form 475 ]
- revocable transfer on death deed (RTDD), used in lieu of an intervivos trust vesting for residential property estate planning; [See RPI Form 411]
- lease agreement, conveying a leasehold estate; [See RPI Forms 550 and 552] and
- court order, awarding ownership in litigation.
A grant deed is used to pass a fee simple interest in real estate from the owner to another person, unless a lesser interest is stated in the deed. While no precise words of conveyance are necessary, use of the word “grant” in the granting clause, without noting a lesser interest in the description of the parcel, indicates the conveyance of a fee simple interest in the described parcel. [Calif. Civil Code §1092; See RPI Form 404]
Alternatively, a quitclaim deed is intended to convey whatever interest — if any — the named grantor may hold in the real estate.
Unlike the use of a grant deed, a quitclaim deed provides no implied warranty imposed on the grantor that they actually hold any interest in the property to convey. Further, a quitclaim deed imposes no warranty on the grantor that title was not further encumbered during any ownership they may have had.
The type of deed used to convey property determines whether the person conveying title makes assurances others can rely on in the future. For example, a grant deed conveys an interest in real estate based on covenants concerning title activity of the grantor related to the interest conveyed. A quitclaim deed is used to convey any interest in real estate the grantor may hold but without any assurance the grantor holds an interest to convey.
Related reading:
Form-of-the-Week: Grant Deed and Quitclaim Deed – Forms 404 and 405
Grant deed covenants are implied
The covenants of a grantor, sometimes called warranties, are implied by the use of a grant deed to convey an interest held in real estate. A conveyance by a grant deed warrants the:
- interest conveyed in the real estate has not been previously conveyed to another, except as disclosed in the grant deed; and
- grantor has not further encumbered the real estate interest conveyed, except as disclosed in the grant deed. [CC §1113]
On a breach of a grant deed covenant, the buyer (grantee) may recover their money losses from the seller (grantor) for the breach of the implied covenant, as though the covenant was a written provision entered in the grant deed. [CC §1113]
Consider a seller who owns a parcel of real estate which has appurtenant water rights in other real estate. The seller enters into a purchase agreement with a buyer, agreeing to convey the parcel to the buyer.
The seller signs a grant deed and hands it to escrow for delivery to the buyer on closing. However, before the grant deed is recorded to deliver ownership to the buyer, the seller conveys appurtenant water rights held in another parcel of real estate to another person.
After closing, the buyer discovers the seller conveyed appurtenant water rights to another property owner.
The buyer claims the conveyance of water rights is a breach of the implied covenant against a previous conveyance of an interest in the parcel. The buyer makes a demand on the seller for an amount of money equal to the value of the water rights they did not receive.
In this example, the seller is liable to the buyer for the dollar value of the water rights conveyed to another without disclosure in the grant deed. The water rights were appurtenant and belonged to the ownership in the property conveyed, not a gross personal right separately held by the owner. The seller breached the implied covenant in the grant deed by conveying the property’s water rights without noting the conveyance as an exception in the grant deed they delivered to the buyer. [Lyles v. Perrin (1901) 134 C 417]
Possessory interests in real estate
Real estate is conveyed when title is transferred from one person — individual or entity — to another. [CC §1039]
The written transfer of an interest in title to a parcel of real estate is called a grant or conveyance, no matter the form of writing. [CC §1053]
A deed itself is the grant which on delivery transfers title to property. [Hamilton v. Hubbard (1901) 134 C 603]
Title by deed passes either:
- voluntarily by agreement with the owner, as in a sale in the open market or by foreclosure on a trust deed or assessment bond; or
- involuntarily without agreement, such as the enforcement of a creditor’s judgment or a tax lien.
Further, no matter the form of writing, the individual conveying an interest in a parcel of real estate is called the grantor. The individual acquiring title to the interest is called the grantee.
Ownership of possessory interests in real estate include:
- fee simple;
- life estate;
- leasehold estate; and
- estate at will.
Fee simple ownership is presumed to pass by a grant of real estate, unless a lesser possessory interest is stated, such as an easement, life estate or leasehold interest. [CC §1105]
A fee simple interest in real estate is the ownership of all rights in the real estate for an indefinite duration – inheritable property rights.
Related video:
Agreements to sell, lease or mortgage interests in a parcel
To secure payment of a monetary debt by a lien on an interest in a parcel of real estate, a security device is used to document the lien. The device exclusively used is a trust deed, commonly called a mortgage. The trust deed is always the preferred arrangement used to impose a voluntary lien on real estate. [See RPI Form 450]
The trust deed as an agreement authorizes the lender or carryback seller — mortgage holder — to sell the encumbered interest in the property by a trustee foreclosing by a sale of the interest when the owner defaults on terms of the note or trust deed. The trust deed, by its words, purports to convey legal title to an administrator, called a trustee. In reality, title is not transferred by a trust deed, and the referenced trust is a legal fiction. In fact, a lien is created, an encumbrance on the owner’s interest in the property subjecting the interest owned in the described parcel to a lien to secure repayment of a specific monetary debt, evidenced by a note.
Further, the trust deed identifies three parties, each of whom has distinctly separate roles in the life of the mortgage transaction:
- the borrower/property owner (trustor) who voluntarily imposes the trust deed lien on a parcel they own a possessory interest in;
- the middleman (trustee) who holds the power of sale over the parcel and need not be named but may be anyone other than the borrower/owner; and
- the lender or carryback seller (beneficiary) who holds the security interest in the parcel as a lien acquired on recording the trust deed.
The owner executing a trust deed encumbrance on their real estate is usually borrowing money to:
- refinance an existing mortgage,
- further finance to obtain cash (the ATM effect), such as through a further encumbrance, such as a HELOC or reverse mortgage, or
- fund the purchase price to buy the property, unless the property is acquired in a seller-financed credit sale.
Related video:
A trust deed lien may also encumber the ownership of an interest in a parcel that is less than the entire fee simple interest, such as:
- a fractional co-ownership;
- leasehold interest;
- life estate in the property;
- equitable ownership rights of a buyer under a land sales contract; and
- purchase rights under an option to buy.
For example, a tenant owning a possessory right to a residential unit or commercial space under a long-term leasehold interest conveyed to the tenant, not the fee interest, may encumber their leasehold interest with a trust deed even though another person holds fee ownership of the real estate. [CC §§783, 1091, 2947]
Further, the trust deed lien created by the owner of a fractional interest in the real estate attaches only to the interest held in the property. The lien does not attach to the interests of any co-owners or other interests held in the property. [Caito v. United California Bank (1978) 20 C3d 694]
To encumber community property ownership of an interest in real estate, both spouses consent to the encumbrance as it is owned by the community, a type of partnership, with the exception of an attorney fee agreement in a divorce proceeding. [Calif. Family Code §1102]
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