Chapter 9

Transferring Ownership: Deeds and Title Closing

IN THIS CHAPTER

Bullet Understanding the elements of a deed

Bullet Finding out about different kinds of deeds

Bullet Examining several ways to legally describe property

Bullet Discovering what happens before, during, and after a title closing

Your job as a real estate agent all comes together when ownership of a piece of real estate goes from one person to another. You’ll probably get paid only if ownership of the property is transferred as a result of a sale or an exchange. By the way, another term that means the same as transferred in real estate language is conveyed, and I use the two words interchangeably. From the real estate agent’s perspective, after a deal has been reached, a few more steps still need to be taken by either or both the agent and attorneys to change ownership of the property from one person to another.

This chapter gives you important information about how ownership of property is transferred from one person to another. I talk about the documents that are needed, such as the deed, and how property is described so that no mistakes can be made about who owns what. And I discuss a process called title closing, where ownership of the property actually goes from one person to another.

Remember Title in real estate terms means ownership. So rather than use the word ownership, most people in real estate work say things like “The title was conveyed on Tuesday” to indicate when ownership was transferred. Unlike with automobiles, the title is not a document. And as already mentioned, the words convey and transfer apply to ownership of a property moving from one person to another, regardless of circumstances. Whether you’re talking about a gift, sale, or exchange, title is conveyed or transferred.

Doing the Deed: Delving into Deed Basics

The deed is an extremely important piece of paper, a document that transfers title to a property from one person to another. It’s important not only because it transfers title, but also because until you convey title to someone else, it serves as proof of your current ownership. It also serves as a permanent record of your ownership.

In this section, I give you information about what specific factors and terms must be included in a deed to make it valid, and I talk about some other language in the deed that can affect how you use the property and spell out some information about different types of deeds for you. This section also includes some information about how real estate is described so that no one can question who owns what.

Making it right: Requirements for a valid deed

State specific The requirements for a valid deed have been passed down through history by common practice and law so that no one can have any misunderstandings about

  • What is happening when the title to a property is conveyed.
  • Who owns the property now.
  • To whom the property is being conveyed.
  • What (exactly) is being conveyed in terms of the property boundaries.
  • What rights are being transferred.

State specific Because of the importance of establishing and proving property ownership, all states have adopted legislation called the statute of frauds. The statute of frauds requires that all real estate transfers of title be in writing. Depending on your state, and sometimes even where you happen to be within your state, attorneys are required to prepare deeds, the exact form of which may vary somewhat; however, the essential requirements for a deed, and therefore the conveyance, to be valid are the same. The requirements that follow are listed in the general order in which they appear in most deeds.

  • Grantor: The grantor is the current owner of the property who is conveying the title to someone else. The grantor must be legally competent and of legal age. In most places, the minimum legal age of competence is 18, but you may want to check what it is in your state, though it’s unlikely to be a specific test question. Remember the grantor can be selling the property, exchanging it, or giving it away. The grantor can be a corporation or multiple parties if it’s a co-ownership situation.
  • Grantee: The grantee is the person receiving title to the property. An important factor in naming the grantee in a deed is that the grantee be named in such a way as to avoid any confusion about who he or she is. So, if the grantee is John Smith III, then he better be named that way in the deed, especially if John Smith I and John Smith II are still around. Addresses for both grantor and grantee are also sometimes required. Grantees can also be corporations or multiple parties.
  • Consideration clause: The deed must contain words that indicate that the grantor is receiving something of value in exchange for the property. Generally, money is being received, and the consideration clause needs to state the amount. In some places, the phrase “ten dollars and other valuable consideration” or something similar is used for the consideration. No, the buyer did not get a super bargain as some people might think. The reference to ten dollars is used to hide the actual amount paid for the property if someone wants to keep that information confidential. I show you how you may be able to find out what amount was actually paid in “Recording the right documents,” later in this chapter. When the property is a gift, the words “for love and affection,” or similar phrasing, are used.
  • Granting clause: A granting clause states that the grantor is conveying ownership of the property to the grantee. In fact, the granting clause also is known as the words of conveyance. (In Chapter 6, I tell you what it is you really own when you own a piece of real estate.) The granting clause includes words that describe exactly what rights the grantee is receiving in the deed and whether the grantee is taking title to the property with another person.
  • Habendum clause: The habendum clause, which contains the words “to have and to hold,” further defines the rights being granted to the grantee. (For those of you who’ve already tied the knot, the habendum clause may sound a little like you’re getting married again.) The words in the habendum clause must agree with the words in the granting clause.

    State specific The inclusion of a habendum clause may vary from state to state.

  • Legal description: I provide detailed information about different ways a property can be described in “Painting the right picture: Property descriptions in deeds” later in this chapter. For now, though, just think of the legal description in this section as wording that’s designed to leave no doubt about the exact boundaries of the property being conveyed.
  • Exceptions and reservations: In Chapter 8, I give you information about the limitations that can affect how the property is used through such things as deed restrictions and easements. This part of the deed is where those restrictions or limitations are described.
  • Grantor’s signature: The grantor must sign the deed for it to be valid. Usually, if more than one person owns a property, all the owners must sign. In some states a husband or wife who owns property by himself or herself may have to have the spouse also sign the deed even though the spouse does not have title to the property. An attorney-in-fact can be permitted to sign the deed in most states. An attorney-in-fact is someone who is appointed by a power of attorney, which is a legal document signed by someone giving another person authority to act on his or her behalf, in this case to sign the deed. An attorney-in-fact doesn’t necessarily have to be a lawyer. In some states, a third party must sign the deed stating that the grantor actually is the person who signed the deed.

    If the grantor is a corporation, other rules may apply. A resolution by the corporate board of directors or the majority of the shareholders usually is necessary to convey property owned by a corporation. One or more duly authorized corporate officers must sign the deed. (See Chapter 7 for more about ownership by a business.)

  • Acknowledgment: An acknowledgment is a way of proving that the person who signs a deed signed it voluntarily and is, in fact, who he says he is (or who she says she is). An acknowledgment normally is witnessed and attested to by a notary public, before whom you produce evidence of your identity and indicate that you’re signing the deed of your own free will.

    State specific An acknowledgment technically is not required for a deed to be valid; however, in most states, a deed without an acknowledgment cannot be recorded in the official public records. You can find out more about recording a deed in “Recording the right documents,” later in this chapter, but remember it is usually not necessary to record a deed for the transfer of title to be valid. It’s an awfully good idea but not mandatory.

  • Delivery and acceptance: The conveyance of title to a piece of real estate has not officially taken place until the grantor delivers the deed and the grantee accepts it. The term passing title refers to the acts of giving and receiving the deed. The date of the transfer of ownership is the date the deed was delivered and accepted. An exception to this timing in some places occurs when closing in escrow, which is discussed later in the section “Closing in escrow.” In that case, title passes when all requirements of the sales contract have been met, including the signing of the deed by the grantor and its delivery to the escrow agent.

The deeds of the many: Examining various kinds of deeds

State specific I’m sure you hope that only one kind of deed exists, but alas, I’m sorry, real estate grasshopper, you must deal with several different kinds, at least for the exam. Different deeds serve different purposes, and although all convey ownership, they differ in the kinds of warranties or guarantees they provide for the grantee. Although not required for a deed to be valid, many deeds provide for different warranties made by the grantor to the new owner. The various types of deeds also may differ because of who the grantor of the property is and why the property is being conveyed. Ultimately, these factors are mostly the stuff lawyers revel in, but most states want their real estate agents to have at least a basic knowledge of the different types of deeds.

State specific You should check out the most common types of deeds used in your state and find out whether they have names that are different than the ones I listed. You can get this information in your prelicense course, the textbook you use, and any handouts the instructor gives you. As you read this section for the exam, keep in mind that you usually can tell one type of deed from another by the different warranties provided and the different purposes for which the deeds are used. And state test writers expect you to know only the basic information. You may have plenty of questions that you need to ask your lawyer, but don’t worry about them for the exam. I list the different types of deeds in the sections that follow.

Remember Title insurance usually is purchased regardless of the kind of deed that’s conveyed. Even when the grantee receives a general warranty deed with all the guarantees back to the first owner, title insurance assures the new owner that if a title problem ever comes up, the grantee will be protected and compensated. In addition, title insurance usually is required by the bank or lender, whenever you borrow money through a mortgage loan to buy the property. (For more, see “Proving marketable title,” later in this chapter.)

General warranty deed

General warranty deeds, which sometimes are called the full covenant and warranty deeds, provide the greatest protection and warranties by the grantor to the grantee. The warranties, which are usually called covenants, are listed here in the order in which they usually appear in the deed.

  • Covenant of seisin: Would you believe that some people can’t even agree on the spelling of this? Seisin is the guarantee that the grantor is the owner of the property and has the right to transfer ownership.
  • Covenant of quiet enjoyment: No, this warranty doesn’t mean that the grantor promises that your neighbor won’t play the radio after 11 p.m. Quiet enjoyment means that the grantor guarantees that no one else can come along and claim ownership of the property. It also means that if a later party’s title claim is found to be better than the owner’s title, the grantor is liable and must compensate the grantee for any losses.
  • Covenant against encumbrances: The grantor guarantees that the title to the property has no encumbrances like an easement or lien. Easements are rights that enable someone else to use some of the property, and liens are financial claims against the property. You can find out more about encumbrances in Chapter 8. The only exceptions to this warranty are encumbrances that are specifically stated in the deed.
  • Covenant of further assurance: In this covenant, the grantor promises to obtain and provide documents necessary to clear up any problem that comes up with the title.
  • Covenant of warranty forever: This assurance sometimes is referred to simply as warranty forever. The grantor guarantees to pay all costs to clear up any title problems at any time in the future.

Remember A particular feature of a general warranty deed is that warranties cover any title problems that may have occurred during the ownerships of all past owners. The reason a general warranty deed provides the greatest title protection to the grantee is because this deed provides the most complete set of warranties and the grantor is responsible for all previous owners’ actions with respect to title problems.

Special warranty deed

Special warranty deeds contain only two warranties. The first is that the grantor has title to the property. The second is a guarantee that nothing was done to affect the title during the grantor’s ownership, and if a problem did exist, the grantor will correct it. The differences then between a special warranty deed and a general warranty deed are the number of warranties and the fact that the grantor takes responsibility for things that happened only during his ownership. In some states, the special warranty deed is known as a bargain and sale deed with covenants against grantor’s acts.

Because of the limited warranties, people acting as third parties — that is, they don’t actually own the property they are conveying — sometimes use special warranty deeds. The executor of an estate, for example, uses a special warranty deed to convey property belonging to an estate or trust.

Grant deed

State specific Grant deeds are used in a few states and provide limited warranties. The grantor guarantees that the property hasn’t been conveyed to anyone else, that no encumbrances limit the use of the property except the ones specifically listed in the deed, and that if the grantor later obtains any other title to the property, it will be conveyed to the grantee. These guarantees are limited to the period of time the grantor owned the property. The grant deed is used in only a few states, but if yours is one, you need to remember this information.

Bargain and sale deed

The distinguishing feature of this type of deed is that it has no warranties. That the grantor has full title to the property is implied. Essentially it gives no protection to the grantee. This type of deed sometimes is used in foreclosure and tax sales. You can read about foreclosure in Chapter 15. Warranties can be put into the deed to make it similar to the special warranty deed, and in that case, it’s referred to as a bargain and sale deed with covenant against grantor’s acts.

Quitclaim deed

The quitclaim deed provides no warranties to the grantee and gives no implication of how much or how good the grantor’s title to the property is. It conveys to the grantee only that much ownership interest that the grantor may have. Quitclaim deeds often are used to clear up a cloud on the title. A cloud on the title is something that makes the title less than complete, like someone appearing to occupy the property without the owner’s permission, or indicates that some other ownership interest may exist, like two properties abutting a private road with both claiming ownership of the road. Quitclaim deeds sometimes are used for uncomplicated transfers of property ownership within a family.

Trust and reconveyance deeds

A trust deed, which sometimes is called a deed of trust or deed in trust, is used to convey ownership by a trustor to a trustee for the benefit of a beneficiary as security for a debt. Here’s an example: Party A, the trustor, borrows money from Party B, the lender, and then signs a trust deed conveying ownership of the property for which he borrowed money to Party C, the trustee, a third party. The lender is the beneficiary. If Party A pays all the borrowed money back to the lender, Party C then reconveys the property back to Party A. If Party A fails to repay the debt, Party C sells the property and gives the money to the lender to pay off the debt.

On a related note, a reconveyance deed is used to reconvey title to property from a trustee back to a trustor after a debt for which the property is security has been paid off.

Trustee’s deed

A trustee’s deed is given by a trustee when ownership of property held by a trust is conveyed. Say, for example, that a young child owns property held in trust until he reaches legal age. The trustee of the trust can use a trustee’s deed to convey that property to someone if the trust decides to sell the property.

Court-ordered deeds

State specific Deeds often are issued as a result of legal proceedings. An executor’s deed in the case of a deceased person’s estate and a sheriff’s deed in the case of a sale of property seized by a local unit of government or the bank are two examples of such court-ordered deeds. State law establishes these deeds, and state law governs their form. You probably won’t find many questions on your state exam about this topic, but you need to check it out just in case.

Painting the right picture: Property descriptions in deeds

Describing the boundary lines of a piece of land as accurately as possible in a deed is extremely important. Why this is so important is simple. When you get to the end of your land, you find yourself about to step onto someone else’s land. Contrast that with owning a car. I know what my car looks like, and I know where I park it. No doubts exist about where the car begins and ends. Not so with real estate. (By the way, throughout this section I use the terms land, property, and real estate interchangeably.) Property descriptions of the kind we’re talking about and the kind typically used in deeds are descriptions of the boundaries of the land but don’t include any descriptions of the buildings on the land.

All property owners would want to know exactly what they own but it is especially important because many government land use regulations that govern what you can do with your property involve the size, shape, and boundary lines of the land. Read more about this in Chapter 8. Accurately describing your property is equally as important when transferring title from one person to another. The grantor needs to know exactly what he or she is selling, giving away, or exchanging, and the grantee needs to know exactly what he or she is getting. This property description usually is referred to as the legal description of the property. Legal descriptions are prepared in one of three standard ways that I describe in this section. A few math questions that relate to a property’s description may be included on the exam. I also discuss the measurement of elevations for property descriptions and clue you in on two ways that you can’t describe a property.

Remember Three systems of preparing a legal description can be used anywhere in the United States. Some parts of the country rely more heavily on one system than others. Exam writers like to ask about all three systems regardless of what state you’re in, but they probably emphasize the system used in your state. So study all three systems and especially your local system of legal description. No one is trying to turn you in to a land surveyor, the professional who surveys the property, locating the property boundaries on the ground, and prepares these legal descriptions. Exam questions tend to be recognition type questions, the kind that require you to be able to tell the difference between the characteristics and key definitions of each system of legal description. But the questions can get a little more detailed. I go over this in the following sections.

Meeting your boundaries: The metes and bounds system

The metes and bounds system of legal description uses specific locations, distances, and compass directions to describe the boundaries of a piece of property. Starting at what is known as the place or point of beginning, the description follows a line or curve in a specific direction for a precise distance to another point. At that point the direction changes and the boundary line is then laid out again in a specific direction for a precise distance.

A simple metes and bounds description might then read:

From a place or point of beginning 100 feet North to a point then East 100 feet to a point then South 100 feet to a point then West 100 to the place or point of beginning.

Tip For fun, try drawing this description with pencil and paper. Remember that when laying out a property like this, as you face the paper, north is up, south is down, east is to the right, and west is to the left. What you end up drawing is a square. In reality, metes and bounds descriptions usually are not so simple. The directions often are broken down into degrees, minutes, and seconds, which all are precise points on a compass. The distances sometimes are measured down to inches.

Turning points especially in older descriptions of the boundary lines often refer to natural features like a rock or a stream. Sometimes the boundary of someone else’s property is used as a reference. But property owners change, rocks move, and streams dry up. Over time natural and ownership references have been replaced by artificial markers placed permanently in the ground or simply by points known to the surveyor. Sometimes marking only the place or point of beginning is sufficient rather than marking every turning point. The term monument describes any point in the surveyed boundary that is noted on the survey. Monuments, which usually are turning points, can be man-made or natural. The term monuments may also refer to actual man-made physical markers placed on the land during a survey.

The metes-and-bounds description is clearly stated in the deed. On a large property, with a boundary that features many twists and turns, a metes-and-bounds description can be lengthy. The description also can be used to draw a map referred to as a survey map or simply survey. A survey is the actual determination of a property’s boundaries on the ground. A survey map or sketch is a representation or drawing of the property’s boundaries, sometimes showing structures that are situated on the property.

The metes and bounds system of describing property boundaries is the oldest property description system in the United States. It remains the primary way of describing property boundaries in the eastern part of the country, particularly in the states that formed the original 13 colonies.

You’re so square … more or less: The rectangular survey system

The rectangular survey system, often referred to as the government survey system, is based on a system of lines that form rectangles and squares throughout the United States. The first sets of lines respectively are called principal meridians, which run north and south, and baselines, which run east and west. The principal meridians and baselines are based respectively on lines of longitude and latitude. Just in case you were out the same day I was in high school, longitude and latitude are imaginary lines that divide the earth through the north and south poles (longitude) and run parallel with the equator (latitude). Principal meridians, baselines, and where they intersect (cross each other) are used as the basis for formulating property descriptions in this system. They are the starting points for describing a property’s boundaries. The following is a list of helpful terms:

  • Quadrangles: The basic squares of land of the rectangular survey system, quadrangles (also government checks, or just checks) are 24 miles square (that means each side is 24 miles long) and are delineated by a principal meridian and a baseline. Quadrangles have an area of 576 square miles, more or less, and are divided into 16 townships.
  • Townships: The divisions of a quadrangle, townships, are six miles square (six miles on each side) and are delineated by township lines. Townships have an area of 36 square miles, more or less, and are each further divided into 36 sections.
  • Sections: The divisions of a township, sections, are one mile square and have an area of one square mile, or 640 acres. Sections can be divided in several ways, but basically for purposes of the United States Geological Survey (USGS), they are divided in quarter sections.
  • Quarter sections: The divisions of a section, quarter sections are formed by dividing a section into fourths that are delineated by their direction from the center of the section (northwest — NW, northeast — NE, southeast — SE, and southwest — SW). Quarter sections have an area of 160 acres.
  • Half sections: Half section is a description of any two abutting quarter sections within a section, usually accompanied by a directional notation indicating the half of the section in which the two quarter sections are located. Half sections have an area of 320 acres. So there can be the north, south, east, or west half section.

Because of the curvature of the earth, the lines in the government survey system are only theoretically straight. Imagine trying to draw straight lines on a rubber ball. Although the lines start out the same distance apart, they get closer together as you get near one or the other end of the ball. Correction lines and guide meridians were established to correct this problem in the government survey system. Correction lines occur at every fourth township line or every 24 miles north and south of the baseline. The guide meridians occur every 24 miles east and west of the principal meridian. An area bounded on two sides by guide meridians and on the other two sides by correction lines is called a government check, check, or quadrangle, which is 24 miles square, meaning each of its boundaries is 24 miles long. A government check represents an area that measures 576 square miles. Remember that although these correction lines and guide meridians are the way the government deals with the issue of the earth’s curvature, it isn’t the way the government survey system describes land. In reality, because of this earth curvature issue, many sections and townships vary from their exact area measurements. A system of fractional sections and government lots are parts of standard practice to account for these discrepancies.

So how does the system describe land? Using principal meridians and baselines as points of reference, land areas are divided by two kinds of lines, township lines and range lines. Township lines, which run east and west, parallel to baselines, are horizontal parallel lines that form township tiers. Think about two lines running from left to right across this page about an inch apart. The range lines run north and south parallel to the principal meridians. These range lines form ranges. Think about two more lines running up and down the page on top of the first two lines, also about an inch apart. You got it: Tic tac toe. Where the two range lines and two township lines intersect, they form a township. Now the way it really works is for this page to be filled with the lines going up and down and right to left so that you have many townships. The township is the basic unit of measurement in the rectangular survey system. The area created by the intersection of a township line and a range line is a township. The townships are consecutively numbered by their location within the intersection of multiple range lines and township lines. The boundary of each township is six miles long, so a township contains 36 square miles and is described as being 6 miles square. These townships are not the same as political subdivisions.

Remember Each township is further divided into 36 sections of one square mile each, or 640 acres, by horizontal and vertical section lines. Sections also are numbered consecutively. Section one within any township is always located at the upper right or northeast corner of the township. The numbering then moves from right to left across that first upper tier. The numbering continues directly beneath the sixth section, except that it progresses from left to right on the second tier. The numbering changes directions in the third tier from right to left — see Figure 9-1. In other words, after section number 6, it drops down to 7 on the next tier then goes left to right to number 12. Then the numbering drops down to 13 and goes right to left again and so forth.

Number alignment depiting the arrangement of townships divided into 36 sections of one square mile each, or 640 acres, by horizontal and vertical section lines, and numbered consecutively.

© John Wiley & Sons, Inc.

FIGURE 9-1: Townships are divided into 36 sections numbered consecutively.

Each section of 640 acres can be divided into halves and quarters called, get this, half sections and quarter sections. These divisions mean just that, for instance a quarter section always contains 160 acres, or a fourth of the total 640 acres in a section. See Figure 9-2. Specific directional references are needed in the actual description to locate a particular piece of property but for finding out how large a particular piece of property is, only the fractions matter.

Chart depicting various divisions of a section. Each section of 640 acres are divided into halves and quarters; for instance, a quarter section always contains 160 acres, or a fourth of the total 640 acres in a section.

© John Wiley & Sons, Inc.

FIGURE 9-2: Sections can be divided in a variety of ways, including quarters and smaller sections.

Tip Each half or quarter section can be further subdivided into halves and quarters. So you can refer to the south (S) ½ of the northwest (NW) ¼ of a section in a township, for example (see Figure 9-3 for a variety of divisions in a quarter section). Figuring out the size of that piece of property, which sometimes is called a parcel, is simple, if you keep in mind that you’re always dealing with a section of 640 acres. Putting the above description into words is half of a quarter section. Doing the math, it’s ½ × ¼ × 640 = 80 acres.

Chart depicting the various divisions of the Northwest Quarter section, where each quarter is subdivided into halves and quarters - the south (S) ½ (half) of the northwest (NW) ¼ (one-fourth) of a section in a township.

© John Wiley & Sons, Inc.

FIGURE 9-3: A quarter section can be split into smaller parts.

A full rectangular survey system property description might read:

The SW ¼ of the NE ¼ of the NW ¼ of Section 6, Township 4 South, Range 5 East of the Third Principal Meridian. (This description refers to a 10-acre parcel of land.)

The description probably would include the state and county in which the property is located and use abbreviations so in the example Township 4 South would be T4S. Whenever properties have irregular boundaries, the land may be further described using one of the two other systems described in this section.

Remember You’re likely to see at least a few questions on calculating the area of part of a section, and you’ll also see questions about terminology and some of the measurements that the rectangular survey system uses. You may even see a question or two about the numbering system used for sections. I’ve included samples of these types of questions in the review questions at the end of the chapter as well as in the practice exams at the end of the book. Because the rectangular or government survey system was instituted when the United States was a brand new country, it was used to describe most of the land west of the original 13 colonies, so most of you are likely to see some questions about this system.

Block party: The lot and block system

The last of the methods for preparing legal property descriptions is known by various names, including the lot and block system, the recorded plat system, the recorded map system, the lot block tract system, the recorded survey system, and the filed map system. You can find out the name commonly used in your area when you take your prelicensing course. Regardless of which name you use, the essentials are the same, and it’s the system that’s usually used in conjunction with a new subdivision, or a large piece of property that has been divided into smaller pieces usually to sell or develop separately.

A map or plat or sometimes plat map (they are all the same — don’t you wish these guys could agree on what to call things?) of the subdivision is created, showing the boundaries of each (usually numbered) lot or parcel of land. If the subdivision is large, it may be divided into blocks or sections, each of which is then divided into lots. For example, you can have Lot 2 in Block 1 or Lot 5 in Section A. In a very large subdivision you might see all three terms used, with the subdivision first divided into sections; then the sections divided into blocks, and then the blocks divided into lots. Each lot has a metes and bounds description on it (see “Meeting your boundaries: The metes and bounds system,” earlier in the chapter). This method is the only way a surveyor can look at the map and lay out the boundaries of the property on the actual property. So in reality, the lot and block system is a hybrid that makes use of another system.

After the surveyor draws the map, it must be filed in the local records office. The property owner, attorney, or surveyor usually files the map. If the map were of a new subdivision, then the local zoning, planning or other government officials would already have approved the subdivision. The records office goes by various names in different states and locales, but it generally is part of county or local government. The map is filed in the county (or municipality in at least one state) where the property is located and is kept on file as a public record. The filer is given a record of the filing that includes the filing date and may be marked with a specific reference number given to the map that refers to the document, what type of document it is, the book (sometimes called liber, which is Latin for book) in which it’s kept, and the page number. This reference number helps anyone who wants to locate the map in the records office.

Now how does this work to provide a legal description, say to convey a property? Here’s an example. Buyer A wants to buy Lot 3 in Block 2 of the subdivision I’ve been talking about, which by the way happens to be named Mary’s Subdivision after the subdivision developer’s daughter. (Don’t laugh! That sort of thing goes on more than you’d think.) So now the developer has a deed prepared that includes a property description that reads something like “Lot 3, Block 2, on the final plat of Mary’s Subdivision, filed in the Office of Land Records of Washington County (State), as plat map number 12345, filed on May 15, 2017.” Slight variations may occur in these descriptions, but you get the idea. All deed descriptions always refer back to that recorded plat map.

Remember If you’ve been following this explanation, you may have figured something out. Because the lot and block system and the metes and bounds system are used all across the country, if the property you’re describing is located in a part of the country that also uses the rectangular survey system, and the property is being subdivided into several lots, you can end up with a description that refers to the rectangular survey description and the filed map. And the filed map, which is prepared using the lot and block system, also includes metes and bounds descriptions of each lot in the subdivision written right on the map of the subdivision, even though the deed would use the lot and block number to describe the property.

Taking it up (or down) a notch: Measuring elevations

In surveying work and in preparing property descriptions, measuring or describing space as up in the air or describing an area below the ground surface for subsurface rights sometimes is necessary. As a property owner, you can sell or lease your air rights, or the airspace over your land or building. (For more about air and other ownership rights, see Chapter 6.)

Datum is a point, line, or surface from which elevations are measured. An elevation is a vertical measurement either up or down. Datum for the entire United States is defined by the USGS as the mean sea level in New York harbor. Individual cities, however, may establish their own datum.

Benchmarks are permanent markers established by the federal government to aid surveyors in their work. They exist throughout the United States. Benchmarks are known reference points from which surveyors can work to establish property boundary lines. They are used primarily for ground level locations of distances and directions for property lines, but they’re also used together with a datum to measure elevations, for example, to do a condominium description.

Don’t do that! Illegal ways to describe property

Warning Some of the things you can’t use to describe real estate from a legal point of view are:

  • The property’s address: The address is not considered an adequate description for a property from a legal perspective or for use in a deed. For one thing, it doesn’t specify the boundaries of the land, and for another, in many areas, vacant parcels of land in particular, don’t have addresses. Addresses are used and are acceptable for documents like leases, in which a precise description of the land is not necessary.
  • The tax assessor’s parcel number: Because many assessors use a system of identifying properties that looks similar to the recorded plat map system, tax assessor’s lot, block, section, and parcel numbers can be confusing. An assessor’s parcel numbers, however, can change from time to time and therefore they don’t provide consistency over time. The maps sometimes contain property sizes and general boundary measurements but don’t usually have detailed boundary descriptions of the likes that a metes and bounds description provides. (For more about tax assessment, see Chapter 16.)

Getting Closure: Title Closing

Title closing is a point in time during a real estate transaction when all of the business of transferring ownership of a piece of property is finished and title to the property is conveyed by the grantor to the grantee. Title closing can be either a relatively simple process or extremely complicated. Complications often crop up because of problems with the title to the property. In the world of real estate brokerage, problems at closing can be the result of something so trivial as the owner of the property not mowing the lawn just before the closing. This section is not about those kinds of problems. Instead, it’s about issues that can occur with the title to the property.

State specific This section deals with activities that take place before, during, and after the closing. Closings generally are similar from one state to the next, with the exception of places that close the title in escrow. Other subtle differences may exist regarding who pays for what in terms of various fees associated with the closing, so you need to look for any major differences between the typical closing process that I describe in this section and your particular state’s practices. In addition I point out specific situations that are likely to be different from state to state.

Nearing the finish line: Before the closing

Let me give you a timeline here to put this section in perspective. Typically after all of the looking and talking and negotiation, when a buyer and seller agree on all the terms of the sale, especially price, they sign a sales contract. Essentially the seller (grantor) agrees to sell the property at a certain price to the buyer (grantee). (For more about sales contracts and other types of contracts, see Chapter 11.)

A number of things happen between the time the sales contract is signed and the day of closing title when transfer of ownership of the property actually takes place. Activities after the contract is signed but before closing usually have to do with satisfying the terms and conditions of the contract and any terms and conditions the lender may set, whenever a mortgage is involved in the transaction. One main thing that occurs during the period between contract signing and closing is the title search, which is a look at the records of title transfers between previous grantors and grantees to determine whether any prior claims are on the title to the property.

Proving marketable title

State specific A typical real estate sales contract requires the seller to convey marketable title to the buyer, which means that the title must be free from any reasonable doubts as to who the owner is and free from any defect in title itself. The objective of establishing a marketable title is to prove that no clouds are impeding clear title to the property. A cloud on the title is something that casts doubts on the grantor’s ownership of the property. Although strictly speaking, it doesn’t constitute a cloud on the title, clear title has been expanded to mean no problems such as illegal structures or unpermitted improvements to the property. The different ways the grantor may prove marketable title vary by state and may even vary by area within a state. Check out what your state’s common practice is. In general, though, proof of good title can be accomplished in several different ways. Here are descriptions of the four most common ways:

  • Abstract of title: An abstract of title is a report of what was found in a title search, which is a search of essentially all public records related to the property’s title, such as previous deeds and liens. (You can read about liens in Chapter 8.) These records are usually found in the county recorder’s office or land records office of the county in which the property is located. Although anyone can search the public records, during a title search, an abstractor (someone who searches through title records) or attorney researches the chain or history of the title from one owner to the next, looking for gaps in ownership or other factors that appear to cast doubt on the validity of the current owner’s claim to the property.

    The abstract of title then is given to the buyer’s attorney to examine. When the buyer’s attorney is satisfied that the seller has marketable title and issues an attorney’s opinion of title, the closing can proceed. Although you won’t be doing a title search, these are public records and as such can be examined by anyone. Some expertise is needed to look for title issues in the deeds and related filings — like liens — but you can look through previous ownership of the property simply by working backwards from the current owner. Smith, the current owner, is the grantee from Jones the grantor. But one deed back, Jones becomes the grantee from the previous owner, and backwards in time you go.

  • Certificate of title: A certificate of title is similar to an attorney’s opinion of title and may even be prepared by an attorney. It also can be prepared by a title company or an abstractor, the person who actually prepares the abstract. The certificate of title is an opinion about the validity of the title but not a guarantee of title. In this way, the certificate of title is similar to the abstract and attorney’s opinion of title, because it doesn’t protect against ownership claims that may not be in the public record. In issuing a certificate of title, an attorney examines the public records but no abstract of title is prepared.
  • Title insurance: Title insurance can be purchased on its own or as a supplement to an attorney’s opinion of title or a certificate of title. Normally issued after a title search, title insurance provides protection for the buyer, defending the new owner if any future claim is made against title to the property. In many cases where a mortgage loan is involved, the lender requires a title policy that at least covers the lender’s portion of the purchase price. This coverage is called a lender’s or mortgagee’s policy. The owner may want to obtain an owner’s policy to cover his or her interest in the property.

    Title insurance covers various defects according to the laws of the state in which the company issues the policy. The American Land Title Association sets standards for standard and extended coverage. Standard coverage policies insure against things like forged documents, improperly delivered deeds, and incompetent grantors. The standard policy is based on what is found in the public record. The extended-coverage policy, in addition to the coverage in the standard policy, insures against defects that may be found by an inspection of the property, such as someone claiming ownership or rights in the property by virtue of their use. (For more about adverse possession, see Chapter 10.)

    A title company may pay the owner of the property on a claim and then pursue action for damages against some other party. Through the right of subrogation, the title company is entitled to the same rights as the person it insures, which means that after it pays the owner, the title company can then pursue whoever may be responsible for the title problem, say a prior owner, collect, and keep the money it gets.

  • Torrens system: The Torrens system is based on proper registration of the title. An abstract of title and a lawsuit to quiet title, which is where you can go to court to have the court declare that you have clear title to property, are filed with the appropriate authority or office, such as the county court clerk. If approved, a certificate of clear title, called a Torrens certificate or Torrens certificate of title is issued by the court, which unlike the attorney’s opinion or an abstractor’s certificate of title, is considered to be proof of ownership. The Torrens system gradually is falling out of use in the United States, but some states or areas within states may still use it. (Make sure to find out whether your state is one of them.)

Removing liens

The removal of liens is another activity that takes place before closing. As part of a title search, the title company determines whether the property is subject to any liens. Liens, which are discussed in Chapter 8, are financial claims against the property. The owner/seller customarily removes all liens from the property prior to sale but under some circumstances the buyer may pay off the lien. If a lien isn’t removed or satisfied through payment before the closing date, liens usually must be paid off at closing with proceeds the seller receives from the buyer.

Examining encumbrances

Title searches also make note of any other encumbrances on the property. Encumbrances, which are discussed in Chapter 8, are limitations on the owner’s use of property. They include liens but also can be an easement or a deed restriction (also covered in Chapter 8). Generally the buyer accepts ownership of the property subject to these encumbrances. They normally don’t present a problem with the title to the property.

Meeting the conditions of the sales contract

This chapter is about transferring title and all the things that affect that transaction. Although most contract conditions (such as obtaining a mortgage or having a home inspection done) don’t normally affect title, note that before closing, the buyer completes all the conditions that have been put into the sales contract. So, if a sales contract has been signed and indicates that a mortgage loan has to be obtained and a home inspection by a home inspector or other professional must be completed, the buyer is responsible for completing these activities prior to closing. By the way, neither of these things is mandatory nor must they be put in the contract. You can pay cash for a house (well, maybe you can but I can’t) and you don’t have to have it inspected. Immediately prior to closing — usually that day or the day before — the buyer personally inspects the property. The agent selling the property or the agent working with the buyer often conducts this walk-through.

The big day: At the closing

When the big day finally arrives, the buyer, seller, attorneys, and you, the agent, meet to close on the title to the property. By the end of the day, the seller has some money and the buyer owns some property. The people who come to a closing, the roles they play, and the specific activities and papers that are signed vary greatly from state to state and even from area to area within a state. I discuss the people, roles, activities, and documentation that are most important and common, because they are what exam writers like to ask questions about.

RESPA and TILA

The Real Estate Settlement and Procedures Act (RESPA) has to do with closing on the mortgage, which happens at the closing, and simply means signing all the paperwork necessary for the bank to give you, the borrower/buyer, the money that you don’t have for very long because you give it to the seller, and for you to give them the mortgage. You can find out everything you need to know about mortgages in Chapter 15 where you can also read about the Truth in Lending Act (TILA), which governs certain aspects of consumer lending. Both of these acts are designed to protect consumers who borrow money

RESPA is a federal law designed to protect consumers who borrow money through a federally related mortgage loan (loans that are sold on the secondary mortgage market, which you can check out in Chapter 15) to buy residential properties, including condominiums and cooperative apartments. Some of the activities required by RESPA and TILA take place before the closing, specifically provision of the Loan Estimate form to the borrower. Combined actions under both laws also affect the closing itself, particularly the preparation of the closing statement, so I include the discussion of RESPA and TILA here. The Federal Consumer Financial Protection Bureau administers the closing provisions of the integrated RESPA and TILA. It has four distinct requirements:

  • Required reading: The HUD booklet Buying Your Home: Settlement Costs and Helpful Information must be given to anyone applying for a mortgage loan.
  • Estimated costs: The lender must give the borrower a loan estimate of all costs associated with the mortgage loan no more than three days after receiving the application.
  • Closing Disclosure Statement (closing/settlement statement): At least three days before the mortgage closing, which is usually at the same time the title to the property is closed, a settlement statement or closing statement of costs must be prepared and given to the borrower. The settlement statement must be prepared on a form known as the Closing Disclosure Statement.
  • Prohibited kickbacks: RESPA prohibits kickbacks. A kickback is an undisclosed fee, usually secretly paid for referring business to someone. For example: A home inspector who pays a fee to a lender for recommending him to perform home inspections for one of the bank’s customers is accepting a kickback. RESPA forbids such actions.

There are a few consumer protection regulations for the Truth in Lending Act (see more on this in Chapter 15) and RESPA that have been combined specifically with an eye toward protecting people who are obtaining loans to buy a house. The creditor or mortgage broker must do the following:

  • Deliver or mail a loan estimate to the consumer no less than three days after receiving the application.
  • Provide to the consumer a closing estimate no less than three days before the closing.

Allocating expenses with proration

Proration is the allocation of certain expenses between the buyer and the seller. A variety of costs are associated with buying and selling a piece of property. The principal cost is, of course, the purchase price paid by the buyer to the seller for the property. Part of the settlement at closing is accounting for all the costs and fees in addition to the purchase price, making sure they are paid, and allocating them appropriately to the buyer or seller. In some states the attorneys or a representative of the title company (sometimes called a closer) handle this accounting; in others, it falls to the real estate agent. No matter where you are, you need to know something about this.

Remember Two accounting words that you need to know when pondering the closing statement are credit and debit.

  • A credit is an amount owed to the buyer or seller or something for which they’ve already paid. For example, the purchase price of the property always is a credit to the seller, who is owed that money (and a debit to the buyer — see the next bullet point). The down payment, on the other hand, is a credit to the buyer (here, here), who already has paid it. Remember when the buyer paid a deposit (earnest money) at the contract signing, long before the closing. A credit essentially is a financial transaction that’s in someone’s favor.
  • A debit, on the other hand is a financial transaction that is not in your favor, in the case of a real estate transaction, something that the buyer or seller owes. So the purchase price of the house is a debit to the buyer, because he owes it to the seller. If encumbered by an existing mortgage loan on the property, the seller must pay off the mortgage at the closing. So it’s a debit to the seller, but of course not a credit to the buyer because it’s paid to a third party, that being the bank.

State specific Various fees and charges differ from state to state in several ways. Even local differences exist as far as what fees are owed, the amounts charged, whether the buyer or seller is responsible, and when the fee is actually paid. Although I can’t guarantee it, you probably won’t see any questions on specific fees or charges. But just in case, I give you this list of the most common ones so you have some points of reference for getting the additional information you need.

  • Attorney’s fees
  • Appraisal fee
  • Broker’s commission
  • Loan fees
  • Recording fees
  • Survey fees
  • Tax and insurance reserves
  • Title expenses
  • Transfer tax

Although this list is fairly complete, your state may have specific fees that are required or a particular type of transaction may involve additional fees. The fees and charges are accounted for within the closing statement as debits and credits according to who pays and who is owed.

Remember Two types of payments and costs that are allocated between the buyer and seller at closing are accrued items and prepaid items:

  • An accrued item is one that is owed by the seller but is paid by the buyer. Real estate taxes that are paid in arrears (after) is an example of an accrued item. The seller lives in a house where real estate taxes are due December 31 for the entire previous year, a situation in which the taxes are being paid in arrears. The seller transfers title to the house on June 30 but has paid no taxes yet for that year, even though the seller has the benefit of living in the house for six months. The buyer has to pay the full year’s taxes on December 31, but has lived in the house for only six months. Not fair, you say. And you’re right. The taxes are a prorated item at the closing, meaning the seller and the buyer have to share the costs and payments according to who paid and who used the property. In this case, the seller who used the house for six months owes the buyer money, because the buyer is going to pay the taxes for the entire year but only lived there six months.
  • A prepaid item is one that the seller has paid but from which the buyer benefits. I reverse the tax example that I just gave you. Suppose that taxes are paid in advance, such that the Seller pays a full year of taxes for the coming year on January 1 but sells the property on June 30. Having paid a full year’s taxes, the seller nevertheless has enjoyed the benefit of living in the house for only six months. The buyer, on the other hand, has paid no taxes for that year, yet lives in the house for six months. Not fair, again; proration to the rescue. This time the buyer owes the seller money.

In many places, real estate agents either calculate prorations or help attorneys or title companies with the calculations. In other places, attorneys or title companies handle the whole thing. Whatever the particular practice in your area, you’ll probably see some questions about proration on the state exam. I take you through examples of an accrued item and a prepaid item, starting with the simple tax example that I’ve been using with one slight change. (For more proration math practice, check out Chapter 18.)

State specific The way costs are divided up varies from state to state. In the following problems, I use the most common method, a 12-month year and a 30-day month. In some cases, a calendar with the actual day count is used, so the annual tax would be divided by 365 and multiplied by the exact number of days. Ownership of the property on the day of closing is assumed to belong to the seller in many places, but it may vary according to local custom. You’ll want to check that out in your state. Unless your state does something different, or unless you’re given specific instructions in a problem, use the 12-month year, 30-day month method and assume the seller owns the property on the day of closing.

ACCRUED ITEM EXAMPLE

Example Note that I use complete dates (year included) in these examples so that there’s no doubt about what I’m talking about. It’s unlikely that test writers will do the same.

The annual real estate taxes on a property are due each year on December 31 in arrears (for the year just ending). In this case, the date is December 31, 2017. The property is sold on June 1 of that year (June 1, 2017). The taxes are $1,200. Who owes what to whom?

First of all, you know that the taxes are paid for the entire year, or annually, in one payment. Then you know that they’re paid in arrears, which means use it first and pay after (at the end of the year). You also know that the seller owned the property during the first five months of the year and the buyer owns the property for the last seven months of the year. Aha! I may have caught you on that one. Look again at the closing date. The math is pretty straightforward.

  • $1,200 ÷ 12 = $100 per month taxes
  • $100 × 5 months that the seller owns the property = $500
  • $100 × 7 months that the buyer owns the property = $700

Because the buyer owns the property on December 31, 2017, and therefore has to pay the full $1,200 in taxes for the entire year (all of 2017), the seller owes the buyer $500 for the period of time the seller lived in the house. Therefore, the $500 is a credit to the buyer and a debit to the seller. This appears in the closing statement. The $700 is not included in the closing statement, because it doesn’t accrue until after the closing, when it becomes a debt of the buyer who of course has to pay it ($700) plus the $500 to the city for taxes for the whole year.

PREPAID ITEM EXAMPLE

Example Taxes on a property are paid in advance of the year for which they are effective, due on January 1 of that same year. In this case, the date is January 1, 2017. The property closes on August 17, 2017. Taxes are $3,600 a year. The seller will be charged for the day of closing. Who owes what to whom?

This problem tells you that the taxes are paid once a year at the beginning of the year for the whole year ahead. That year of use of the property is divided between the buyer and the seller, who share the tax payments, yet the seller (current owner — before closing) already has paid taxes for the full year.

  • $3,600 ÷ 12 months = $300 per month taxes
  • $300 ÷ 30 days = $10 per day taxes
  • $300 × 4 months = $1,200
  • $10 × 13 days = $130
  • $1,200 + $130 = $1,330 due to the seller by the buyer

This amount is a seller credit and a buyer debit.

Look at a couple of the steps in this problem closely. The four months that you multiply the $300 by are the four months (September, October, November, December) that the buyer will own the house. The 13 days is likewise the part of the month of August that the buyer will own the house (remember that I used the 12-month year, 30-day month method). So the buyer owns the property for four months, 13 days and needs to pay the seller the share of the taxes for that period of time.

Not all prepaid items have to be divided up. For example, a home heated with oil often has fuel left in the tank when the house is sold. For example, suppose 300 gallons of oil were purchased and paid for by the seller sometime before the closing, and the seller has used some of the oil he paid for. The remaining oil is essentially sold to the buyer, who of course will use the rest of it after she moves in. In this example, the cost of the remaining oil in the tank will be calculated and will become a debit to the buyer. There is no credit to the seller because he already used a portion of what he paid for. Similarly, in rental properties, security deposits, which in reality belong to the tenants but are held by the landlord/seller in trust, are turned over to the buyer.

Passing title

At some point after the buyer and seller sign their names on a variety of documents, the seller (unless he’s done it already) signs the deed, which is given to the buyer or more likely the buyer’s attorney. Although some things have yet to happen after the closing, title, meaning ownership of the property, is conveyed when the buyer accepts the deed.

Closing in escrow

A process that’s common in some states is called closing in escrow, and it involves using a third party, sometimes called an escrow agent, to gather all the documents necessary for the closing and then forward them and money (as is appropriate) to all the parties involved. Sellers provide, among other things, a deed, evidence of title, information necessary for either paying off or assuming an existing mortgage, and any other documents necessary to provide a marketable title clear of all defects, encumbrances, and liens. The buyer provides funds for the purchase, mortgage loan documents if any are required, and hazard or other necessary insurance policies.

Escrow agents may be attorneys or representatives of a title or an escrow company. Real estate brokers can offer escrow services but not in transactions in which they’re directly involved.

State specific

You should find out if your state is one where closing in escrow is typical. If so, you may want to learn who can be an escrow agent, what the requirements might be, and any other information that might make for a test question or two.

A little paperwork: After the closing

A few things take place after the closing. Although ownership of the property changed from seller to buyer at the closing, the final closing statement needs to be prepared and a variety of documents need to be recorded.

Preparing the final closing statement

Although the Closing Disclosure Statement would have already been delivered to the buyer/borrower, until the closing is complete and final costs are allocated, the final settlement statement can’t be prepared. The most common form of closing statement for residential properties is the Closing Disclosure Statement, required under the Combined TILA-RESPA Disclosure Rule, which is prepared at or just after closing. Copies of the statement are sent to the buyer and seller along with many other necessary documents. Closing statements can be prepared by anyone with all the appropriate information, but typically the buyer’s or seller’s attorneys or the title company prepares the closing statement. It’s primarily a financial document stating who owes what to whom and who has already given over money that will be distributed (typically deposit money paid when the contract was signed and being held by an attorney or real estate broker).

Recording the right documents

State specific The act of recording the transaction documents is the final step in the closing process. The documents are recorded at the appropriate government office that is designated for this purpose. Documentation of real estate transactions usually takes place at the county level, meaning you file documents in the county where the property is located. You need to find out the name of the office or department where deeds and other such documents are filed in your location. Typically, the title company files the documents but it could also be handled by one of the attorneys or anyone else connected with the transaction, for that matter.

All documents relating to an interest in real estate need to be filed. Deeds, mortgages, liens, long-term leases (usually more than a year), and easements are typical documents that are recorded. The act of recording provides what is called constructive notice to the public. Constructive notice provides an opportunity for anyone who’s interested to research the records. These public records provide parties who have an interest in the property in some way — brokers, attorneys, abstractors, and the public — an opportunity to investigate the ownership of the property and possible encumbrances on the title.

Recording usually involves payment of a fee, or sometimes two, usually for the act of recording itself. Perhaps a dollar a page or some other amount is charged for actually processing the document. In addition, the recording office may also be the office to which the state and sometimes local transfer taxes are paid. This state transfer tax is mentioned in the list of possible closing costs in “Allocating expenses with proration,” earlier in this chapter.

State specific You definitely want to find out whether your state charges a transfer tax on real estate transfers and/or a mortgage recording tax and how much they are (particularly the real estate transfer tax). These taxes usually are based on the sale price of the property or the amount of the mortgage loan. In some cases, states have created surcharges for high-value property sales. Local municipalities, on occasion, also have created their own transfer tax.

Remember Be prepared for a math question or two on the subject of recording. I take you through a couple of samples.

Example Say, for example, the deed transfer tax in your state is $2 per $500 of the sale price, meaning that for every $500 increment of the sale price you pay a $2 tax on the transfer. So if the sale price of the property were $1,000, you’d pay $4 in transfer taxes. But if the sale price of the property were $255,000, how much is the transfer tax?

  • Answer: $255,000 ÷ $500 = 510
  • 510 × $2 = $1,020 transfer tax

Note: The number 510 is just that, a number and not a dollar amount. It’s the number of times the unit of $500 is contained in $255,000.

Many deeds don’t state the amount of consideration. They may state the price of the property as “$10 and other valuable consideration.” No, you don’t get to pay the transfer tax on the $10. You have to pay it on the total amount, and that leads to a neat trick you can use when you want to know what your brother-in-law paid for his house, but he won’t tell you. Take a look at the next problem, which is the reverse of the earlier example. I’ll do an obvious example first just to show you where I’m going.

If you look up the transfer tax paid on a piece of property and find out it was $2, then based on the transfer tax rate that I’ve been using ($2 per $500 of value), the value of the property is $500.

Example So you go to the county clerk’s office and find the deed to your brother-in-law’s property, and although it doesn’t tell you how much he paid for it, you can find out that he paid $1,020 in transfer tax. The amount of transfer tax paid usually is a matter of public record and often is noted on either the deed or an attached document. Because you know the transfer tax rate is $2 per $500 of the sale price, you can calculate what he paid for the property.

  • $1,020 ÷ $2 = 510
  • 510 × $500 = $255,000 sale price of the property

You see, all you did was find out how many units of $2 are contained in the $1,020 total transfer tax that was paid, and because each unit of $2 represents $500 of the sale price, the final step is to multiply.

If a mortgage is being assumed, that is, the buyer takes over the existing mortgage of the seller, the amount of the mortgage balance may be subtracted from the sale price of the property when calculating transfer taxes. So in the earlier examples, if you assumed a mortgage with a $100,000 balance, you’d only pay transfer taxes on the remaining $155,000 in some jurisdictions.

Review Questions and Answers

Most of the questions you’ll see regarding this topic on an exam are definitional or fact-based. The examiners, at the very least, want to make sure you understand what various terms mean. This is especially true for the salesperson’s exam. At the broker’s level, you may have to wrestle with short cases that require an understanding and application of the material. However, even handling those types of questions starts with a basic understanding of what the terms mean.

1. Typical wording in the habendum clause would be

(A) “I hereby grant.”

(B) “In witness whereof.”

(C) “To have and to hold.”

(D) “$10.00 and other valuable consideration.”

Correct answer: (C). “I hereby grant,” “In witness whereof,” and “$10.00 and other valuable consideration” are other parts of a deed, but “to have and to hold” is typical language for the habendum clause.

2. The law that requires that a deed be in writing is called

(A) the statute of frauds.

(B) the tort reform act.

(C) the acknowledgment law.

(D) RESPA.

Correct answer: (A). The tort reform act has to do with civil suits. I made up the acknowledgment law. And RESPA has to do with federal requirements for closing title.

3. Whose signature is required for a deed to be valid?

(A) Grantor

(B) Grantee

(C) Both grantor and grantee

(D) Notary public

Correct answer: (A). The grantee must be named in the deed but does not have to sign. So that makes Answers (B) and (C) wrong. A notary public witnesses the acknowledgment. The acknowledgment is not required for a valid deed, only for the deed to be recorded.

4. What is the most likely explanation when you see the words “for love and affection” as the consideration in a deed?

(A) The grantor and grantee are related.

(B) The grantor and grantee want to keep the actual selling price of the property a secret.

(C) The grantor and grantee were represented by the same real estate agent.

(D) The grantor gave the grantee the property as a gift.

Correct answer: (D). The relationship of the grantor and grantee wouldn’t matter because it still can be a sale. If they wanted to keep the price a secret, they probably would use “ten dollars and other valuable consideration.” The nature of the representation in Answer (C) doesn’t affect the deed.

5. The guarantee of the grantor’s ownership of the property is called the covenant of

(A) quiet enjoyment.

(B) warranty forever.

(C) further assurance.

(D) seisin.

Correct answer: (D). You need to be able to describe each of the covenants in a sentence so that you can pick out the correct answer in a question like this. If it helps, remember that seize (the root of seisin) means to take hold of something.

6. A deed conveying title to property from a trust is called a

(A) deed of trust.

(B) deed in trust.

(C) trust deed.

(D) trustee’s deed.

Correct answer: (D). The first three answers have to do with using a deed to convey an interest in the property as security for a debt. Tough question.

7. The area of a section is

(A) 43,560 square feet.

(B) 80 acres.

(C) 160 acres.

(D) 640 acres.

Correct answer: (D). 43,560 square feet is the area in square feet of one acre (a useful number to know). 80 acres and 160 acres are portions of a section.

8. Which section is bounded on four sides by sections 10, 14, 16, and 22?

(A) 9

(B) 15

(C) 17

(D) 13

Correct answer: (B). A pretty standard exam question is locating a section within a township. If you read this question and then looked at Figure 9-1 earlier in the chapter, you cheated, because you won’t have that kind of crutch on an exam. Exam writers expect you to be able to lay out a township grid with all the sections properly numbered. Remember that every section within a given township is numbered the same way.

9. A title free from any defects is a good definition of

(A) equitable title.

(B) marketable title.

(C) certified title.

(D) insured title.

Correct answer: (B). You can find out about equitable title in Chapter 11. Certified title and insured title are close. A title usually is not certified or insured unless it’s clear of defects. But the definition of title clear of defects is marketable title.

10. What type of notice is provided by the recording of a deed in the public records?

(A) Actual

(B) Inquiry

(C) Constructive

(D) Real

Correct answer: (C). Constructive notice is provided by recording the deed. Actual and inquiry are types of notice. Real is not.

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