Breaking Down the Basics
Before delving into the subsection-by-subsection analysis of the contract, we must first have a basic understanding of what a Colorado real estate contract consists of, and what the general components are that every buyer and seller should be familiar with when choosing to sell. Generally speaking, a Colorado Real Estate Contract will contain the following:
· A pre-printed form that has been approved by the Colorado Association of Realtors (CAR) or the Colorado Real Estate Commission (CREC). CAR forms are used by licensed real estate professionals, while CREC forms can be used by anyone (licensed or not).;
· The date that the agreement/contract was executed;
· The property and the legal descriptions of the real estate being sold;
· The price of the property;
· Financing terms;
· Earnest Money provisions and terms;
· Title and title insurance issues;
· Obligations to the buyer and seller;
· Default provisions;
· Remedies for breach of contract;
· Settlement provisions;
· Closing and possession provisions;
· Materialdisclosure provisions;
· Financing terms and provisions;
· Property pre-inspection provisions;
· Mapexclusion provisions;
· Mechanic’s lien provisions; and
· Miscellaneous provisions .
Again, a buyer/seller would be prudent to review all of these terms and conditions of the contract before executing the contract, as the listing agent is only required to explain in general terms the provisions contained within the contract. When you sit down and review a contract with your broker/brokerage, you should be prepared to ask questions and have them answered, including how they apply to your specific real estate transaction. Of course, each purchase/sale agreement will differ slightly from the next, so you should review each contract as if it were new, and understand how it works before executing.
The Offer and Negotiation Process
The offer and acceptance process is relatively straightforward, but there are some important points of which homebuyers and sellers should be aware in the context of a Colorado real estate contract. First and foremost, the contract is not binding until it has been signed by both parties. Counteroffers after the original contract has been rejected may be considered an offer if they’re clear enough that the other party feels that they must either accept or reject the counteroffer.
Note that the seller may request a specific "Sign by" date, such as number of days from the date of the offer to allow or disallow contingencies. This date can often be used as a bargaining tool, particularly if the buyer must vacate their current residence based on a timetable and it’s important that their offer is accepted within a narrow window of time.
There are some important timelines for both offerors and offerees as well, and in order to protect against some types of assumed silence, a good real estate attorney will recommend that the offer be made "at least" number of days prior to the closing date.
The buyer will typically be the offeror either directly or via their real estate agent. Once the contract has been signed by both parties, it becomes legally binding unless there was a material misrepresentation or failure to disclose certain facts in the original offer. Essentially, buy or sell at the agreed-upon price, or risk facing a lawsuit for specific performance.
In the case that the sale falls through because of a nonmaterial breach by either party, the court may require one party to compensate the nonbreaching party for any actual losses experienced up to that point.
Inspection Contingencies: A Breakdown
Contingencies involving inspections are very important provisions in Colorado real estate contracts. Such contingencies allow a buyer to make an informed decision about whether to proceed with the purchase of a home, and it is critically important to understand how such an inspection process works prior to entering into an otherwise vulnerable situation. When you make an offer to buy a house, it is typically contingent on the buyer either having a full inspection of the property, or a simple walkthrough of the house, having at least one licensed/qualified inspector check the property during the inspection period set forth in the contract, and giving the buyer the ability to terminate the contract if certain issues are discovered via that inspection. This simply allows the buyer to both learn the anticipated condition of the property and what, if anything, needs to be repaired before the sale closes in order to avoid costly surprises down the road. In most contracts, the buyer has only seven days after the contract is executed until which the inspection must be completed. As stated above, once the inspection period expires, the buyer cannot terminate the contract for issues discovered during the inspection. All that said, it can be very difficult sometimes for the buyer to have an inspection performed and the property inspected due to scheduling issues with multiple inspectors, or if the property is in a particularly remote location requiring long drive times for the inspection. As such, there may be some wiggle room in the timeline. In circumstances where substantial issues are discovered during an inspection, the buyer very often may require that the seller agree to covering the cost of remediating such issues before the sale is completed. It is very important to remember at this time that, in Colorado contracts for the purchase and sale of real estate, you are effectively locked into purchasing the property as-is unless you have a contractual right to require the seller to fix any issues revealed by the inspection. This is an extremely valuable contractual right, and you should make sure you know if any remedial efforts are either required or optional. If they are optional, you have significant flexibility in your negotiating position and may want to explore what kind of completion timetable the seller would require to perform the remedial work.
Getting to Know the Financing Clause
Financing terms are the terms set forth in the contract regarding the buyer’s ability to get a loan. These terms set a timeline for the buyer to apply for a loan, get a loan commitment letter from the lender and to close by a date certain if the buyer has the right to extend the closing date until the loan is complete. If financing is a contingency (meaning it is not a requirement to closing), then there is also a deadline/timeframe within which the buyer needs to terminate the contract in order to get their earnest money deposit back (i.e. there are options for extension of each of these deadlines). Closing this whole transaction is really contingent on a loan actually getting obtained or secured. A mortgage or deed of trust is a promissory note given by the buyer to the bank/lender. A mortgage/deed of trust is a device enabling the lender to collect a debt, using the property as collateral, which the buyer promises to pay and which pledge is a voluntary lien upon the real property. A deed of trust is different from a mortgage in this sense: a mortgage creates a direct secure relationship between the note (the evidence of debt) and the real estate; a deed of trust creates an indirect secure relationship. The key here is that the buyer gives a promissory note to the lender which is secured by the property. When a buyer gets a loan, the loan will be in first priority as long as it is recorded in the court system. The buyer is getting financing in the amount of the offer price, minus the deposit, minus any "due diligence" amounts (like a home inspection, for example). The lender, being in first position (i.e. first lienholder), will have a first priority security interest in the property. As such, this means that if a buyer defaults on the promissory note and therefore the loan, the lender can go into court and foreclose on the property. Because the lender has a first position claim to the property, that lender gets to decide whether or not to start the foreclosure process in an effort to secure the debt owed on the promissory note. The buyer/borrower does not get to decide. Why? Because this is a judicial process, the courts get involved and the courts only listen to one party- the lender. The lender needs to initiate the process by filing the lawsuit and providing sufficient evidence that a default has occurred in order to get a judge to grant them the right to start the foreclosure process . At this point the clock starts ticking on a judicial foreclosure and becomes a race against time for the borrower to get the money to pay off the promissory note or for the lender to get a judgment in place and take its money. The parties will want to include which lender or bank they are going with on the financing. What if the lender goes out of business, files bankruptcy, or otherwise cannot process the loan application in time to keep the transaction on track so that it can close by the deadline in the contract? Well, the buyer gets the opportunity to find another lender, assume the new lender has the same underwriting guidelines as the original lender. If the buyer has been diligent in applying for a new loan, however, the seller will be required to give the buyer even more time to get another loan. The seller should be careful in agreeing to provide the buyer with more time to apply for a new loan- the seller may not want to drag this out any more than they have to. In fact, the seller can terminate the contract if the buyer has not made diligent efforts to perform its obligations under the contract. One of those obligations is to apply for a loan in a timely fashion in accordance with the financing provision of the contract. Whether the buyer has made diligent efforts to get a new loan will often come down to a factual question, which is for the court to decide. If the buyer has made diligent efforts to get a new loan, however, but has not been successful, the contract should track that and allow the buyer even more time to apply for a new loan. The contract will state how many days after the termination deadline the buyer will have to voluntarily terminate the contract and then how many days after that the buyer will have to apply for a new loan in order to meet this contractual requirement. Most buyers will get a pre-approved mortgage loan before being eligible close on the sale. While the seller will generally require the buyer to get approved for a mortgage loan in order to close on the deal, a well written contract will not require evidence of a pre-approved mortgage loan in order for the buyer to extend the contract. This is important because with so many lenders on the market today it can be difficult to get through preliminary loan approval, especially with self-employed borrowers. Not requiring the borrower to have an pre-approved loan is often in the best interest of both parties as it incentivizes the buyer to keep the closing date on the calendar even if it means having to find other ways to finance the closing.
Closing in on it: The Final Hurdle
The closing process for real estate transactions is the final step in the sale of a property, and it’s crucial to understand as a buyer or seller in Colorado. In the days and weeks leading up to the closing, the parties’ legal representatives work to tie up loose ends. It is often a flurry of activity as last minute provisions are agreed to, and additional escrow instructions are exchanged.
On the day of closing, the parties must meet any remaining obligations including provisions like financing contingencies or inspections. Then the parties execute final documents necessary to complete the required transfer of title and funds. Executed documents are then submitted to an escrow agent or closing attorney for recordation and distribution. The parties will also make arrangements to disburse funds to pay closing costs.
Once the executed documents and funds are received by the escrow agent, they are recorded with the county clerk and recorder, typically by the closing attorney. After the deed is recorded, the transfer of real estate is complete and possession of the property transfers. Only after the funds have been distributed and the parties’ respective interests in the real estate have been legally transferred will the parties be released from all obligations under the contract. Because of the complicated nature of the closing process, buyers and sellers are always advised to seek legal counsel.
Common Mistakes and What to Watch Out For
Navigating the Colorado Real Estate Contract can be a challenging endeavor, particularly for first-time homebuyers and sellers. While most people know to consult with a real estate agent, there are still a plethora of pitfalls that can crop up during the process if a buyer or seller is not careful. Over the past decade in my real estate practice, I have identified a few pitfalls that continue to appear. Below is a sampling of those pitfalls with tips on how buyers and sellers can avoid them.
BUYERS
Making an Offer Without Seeing the Property: A common situation that we see on the listing side is a buyer making an offer on a property even though the buyer has not yet seen the property. If a buyer has seen the property previously, then making an offer under these circumstances should not be a problem; however, local custom dictates that buyers should visit the property one more time before closing. This is usually referred to as a final walkthrough. Generally speaking, buyers can make an offer on a property without viewing it in person, as long as they are comfortable doing so. The catch is that the buyer must be willing to purchase the property, regardless of any issues that may arise. If you are not ok with this, then this may not be the best option for you.
Understanding the Acceptance Timeline: When a seller receives a written offer from a prospective buyer, the seller has three options: accept the offer as is, reject the offer, or provide a counter offer. If a seller makes a counter offer, the buyer now has those same three options. It is important to note that if an offer or counteroffer is accepted, the buyer’s acceptance is not binding until the seller also accepts in writing. This is significant because, in most cases , the offer or counter offer will contain an expiration date. This means that if the acceptance happens after the expiration date, then there is no acceptance at all and the contract is void. Thus, sellers should be mindful that their acceptance occurs before the offer or counteroffer expires, otherwise they risk voiding the contract.
SELLERS
Not Disclosing Known Defects: The Colorado Association of Realtors (CAR) has recently created a series of addenda to the standard contract. One of these forms is called the Seller’s Property Disclosure, wherein the seller must disclose any known defects on the property. CAR wants to protect sellers in two ways. First, if a defect arises that was not disclosed on the form, you, as the seller, may have a defense claiming that the buyer should have been aware of the defect if they had performed a proper inspection of the property. Second, and most importantly, CAR wants that the seller notify the buyer of any known defects. If there is active and ongoing litigation over the property, then tell the buyer! Even if you do not think the claim has merit, you must tell the buyer. If a seller does not make material disclosures, and the buyer is later injured because of the non-disclosure, or the sale of the property becomes impossible because of the non-disclosure, the seller could face legal consequences.
Buyers & Sellers
Leaving Blank Spaces: A fully executed contract is a legally binding agreement. Thus, you cannot leave spaces on the contract blank for someone else to fill in, as you do not know what that person will write. Keep in mind that signatures and initials on the contract do not go away when there are blank spaces. Again, as mentioned above, do not leave blanks on the contract for another person to fill in, as those blanks will remain, and they can be signed without your knowledge or signature.