The following comments are intended only to assist in understanding the basic concepts of property ownership/title and should NOT be construed as legal advice or anything more than just an entry level presentation of these concepts. A licensed lawyer should ALWAYS be engaged regarding any questions of legal ownership/title.
A person can receive title to real estate either through a will or by a deed, which is a written document transferring ownership. When the new party holds "legal title," they possess the "bundle of rights" of ownership discussed in the last blog entry. "Equitable title" is the right to obtain legal title/ownership when it is still held by someone else. For example, when a buyer has a valid sales contract to a piece of property and all contingencies have been removed, they will hold equitable title to the property until closing when they will receive legal title to the property. Under a "land contract," on the other hand, a buyer does not receive legal title until the principal of the loan is paid off. Once a deed transferring ownership has been enacted, the title company will publicly record that deed with the County Register of Deeds that will establish a public record of ownership and help protect the new owner from challenges to their ownership.
The most common types of deeds transferring ownership are:
- warranty deed - guarantees the seller's ownership rights but not the physical condition of the property, guarantees that the property is free from liens and encumbrances and that the title to the property is free of defects.
- quitclaim deed - releases an owner's interests in a property but does not provides warranty regarding the condition of the title or the owner's right to transfer title. Often used to clear title defects or convey minor interests in property.
- personal representative's deed - contains no warranties but is used by a personal representtive of an estate to convey property.
- trustee deed - used by a trustee to convey property from a trust account to another party.
That which has impact on holding or transferring clear title to real estate is an encumbrance. An encumbrance is a right to property or interest in it held by a party other than the property owner. It can impact the property or it's value or use but does not necessarily hinder transferrance of the title. Encumbrances include property easements, encroachments, and liens against the property. An easement is the legal right to use another's property without ownership to the property. An encroachment is when a fixture or structure illegally intrudes onto another's property.
A lien is a charge that has been attached to another's property as security against a debt such as a bank lender would place a mortgage lien. A government entity might attach a tax lien for unpaid tax bills or levy property taxes or special assessments against the property. A construction company might attach a construction lien as security. A court could attach a judgment lien to satisfy a debt.
The only effective means of establishing proof of the condition of a title is to do a public records search. This is done by a title company. This establishes a chain of title, the historical documentation of ownership, encumbrances, and liens attached to a property. A marketable title is one that is clear, salable, and reasonably free from litigation. The seller must provide evidence that the title is marketable and acceptable for closing through either an "abstract of title" (a history of the public documents) or more likely through a "title insurance policy" (a contract where the title company reviews the abstract of title and agrees to insure against any title claims) which is paid for by the seller as a closing cost. A mortgage lender will also require a title insurance policy that is paid for by the borrower at closing.
A gap endorsement is an insurance policy that covers title defects that may arise in the gap between the effective date of the title insurance policy or commitment and the date of closing. In Wisconsin, a buyer may stipulate as a condition that a seller provide a gap endorsement to the buyer at the seller's expense.