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Hanging deeds can entangle real estate rookies

Warning to novice real estate investors: The hanging deed is out to get you.

During the past five years, many new investors have entered the real estate market. Some of them have attended seminars on how to flip property, have participated in creative financing deals and literally had overnight success in some cases. People are buying property sight unseen from sellers sight unseen through people who are playing the game with little or no knowledge of real estate license laws or basic real estate law.

Many thought that the real estate bubble was about to burst, but Hurricane Katrina will provide additional air and additional ways for rookie investors to make a quick buck. Later, complaints to regulatory agencies will increase and the investigators will come knocking.

A few fundamentals

So this column is for those of you who bought your real estate investment from a seller you never saw and for those of you who facilitated a transaction in which the buyer and seller never saw each other. Let us begin with some real estate fundamentals.

Real estate is most often transferred from one owner to another by deed. Generally, the following things are required for a deed to be valid, according to “Modern Real Estate Practice, 15th Edition”:

• grantor who has the legal capacity to execute the deed

• grantee named with reasonable certainty to be identified

• recital of consideration

• granting clause

• ownership to be taken by grantee (habendum clause)

• legal description

• exceptions or reservations

• signature of the grantor

• delivery and acceptance.

Note the last item on the list — delivery and acceptance. If you have ever been to a real estate closing, you might have noticed that the closing attorney physically handed the buyer the deed before taking it back so that it could be copied and filed with the Chancery Clerk. It is at that precise instant in time that ownership is conveyed from the seller to the buyer.

It is delivery and acceptance.

Filling in the blank

A hanging deed is one in which the seller signs a deed conveying ownership, but leaves the name of the grantee (the buyer) blank. The seller gives the deed to the broker or facilitator or buyer or whatever the middleperson might be called, takes his money and goes on his merry way. The middleperson then finds a buyer for the property and gives (delivers) the buyer the deed after inserting the buyer’s name in the blank for the grantee.

Obviously, the problem here is that the grantor (the seller) never delivered the deed to the buyer who never accepted the deed from the seller. The deed was accepted from the middleperson. Some will say that the middleperson was the representative of the buyer when delivery was taken from the seller and representative of the seller when it was delivered to the buyer. That is a point that can be argued, but that is not what I am talking about. I am referring to cases where the buyer was not even known when the seller delivered the deed to the middleperson.

Recently, someone told me that in this crazy real estate investment market there are buyers who are actually buying multiple residential rental properties at a time sight unseen from sellers who are giving deeds with the former owners’ names on them. That indicates cases of hanging deeds.

And the problem is…?

So, what is the problem with a hanging deed? For one thing, the conveyance may not be valid. If it can be shown that there was no delivery and acceptance, then the transaction may be void. That could be an important issue if there was damage to the property, such as destruction by a hurricane. The issue would be who owned the property when the damage occurred.

The second problem with a hanging deed is that it is misrepresentation of the actual identity of the seller of the property. That can be a real problem if the middleperson is a real estate agent under the jurisdiction of the real estate licensing law. If the middleperson is not licensed, then there may be misrepresentation as defined under the consumer protection laws as well as the possibility that the middleperson was holding himself or herself out as a real estate broker, which is a criminal offense.

It is pointed out that the comments in this column are not intended to be legal advice or contain legal opinions. Again, the best source for legal opinions and advice is an attorney. If you believe that you have given or received a hanging deed, I urge you to contact an attorney to determine if the conveyance was valid and to learn what you need to do if the conveyance was not valid.

Phil Hardwick’s column on Mississippi Business appears regularly in the Mississippi Business Journal. His e-mail address is phil@philhardwick.com.

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