The Process: Step 6 of Buying a Home in Denver
Colorado Contract Explained
Below is an overview of the Colorado Commission-approved “Contract to Buy and Sell Real Estate”. Please go to the Denver Real Estate Commission website to review the entire Contract and corresponding updates. In Colorado, Contracts concerning real property must be in writing to be enforceable.
Once the Contract is executed (signed by all parties and earnest money delivered) any changes to the contract must be in writing, signed by all parties and delivered via “written notice” within the deadlines set forth in the Contract.
The Contract states, “This form has important legal consequences and the parties should consult legal and tax or other counsel before signing.” While Denver custom in buying and selling residential real estate does not typically involve an attorney or other counsel, the Colorado Real Estate Commission mandates that every real estate agent advise Buyers and Sellers to so.
For simplification purposes, the following overview refers to “conventional loans” only.
- Colorado Contract to Purchase
- General Overview
This section identifies how you wish your legal name to appear on the contract and in which way you wish to take the title. Remember that you’ll need to sign exactly as stated in the Contract on all documents from addendums to Closing. The next portion identifies how you wish to take the title with the three choices as joint tenants, tenants in common or “other” which called “tenant severalty” or solely. Finally, the property’s legal description and physical street address are noted.
Dates and Deadlines
This section outlines the deadlines, ranging from the loan application deadline to the inspection objection deadline to the Closing date. Should any party to the Contract miss a deadline or fail to perform on any outlined term which party is considered to be in default. Please know that I pay painstaking attention to these deadlines so that you meet all requirements.
Inclusions and Exclusions
Pre-identified inclusions are listed in the Contract, e.g., refrigerator, washer, dryer. Fixtures as attached at the date of Contract typically include lighting, heating, and floor coverings. Personal Property, (whether attached to the property or not) includes items such as storage sheds, window coverings, and heating stoves. Prior to writing the offer, you can tell me which additional fixtures or personal property you would like written into the contract. _Additionally, parking and storage facilities, legally described water rights and growing crops (this is Colorado) are covered in this category. Exclusions are identified and typically include anything the listing agent/Seller has noted in MLS. Remember, everything in real estate is negotiable.
Purchase Price and Terms
This indicates the purchase price, earnest money, new loan (or assumption balance or Seller financing), cash at Closing and the total balance. It describes the amount of the earnest and who is responsible for holding the earnest money; whether funds can be immediately verified; and amount of Seller concessions, if any. The Contract identifies the new loan and loan limitations as conventional, FHA, VA or Bond. Finally, it advises Buyers to pay careful attention to the New Loan “Good Faith Estimate” and the amount of the monthly mortgage payment. Importantly, the Contract advises, “If the New Loan is unsatisfactory to Buyer, then Buyer may terminate the Contract no later than Loan Conditions Deadline”. Again, this underscores the importance of using an experienced lender who can assist you in making an informed decision.
Financial Conditions and Obligations
This states that the Buyer agrees to make a verifiable loan application by the Loan Application Deadline as required by the Buyer’s lender. Furthermore, it states, “If Seller does not receive a timely written notice to terminate, this condition shall be deemed waived, and Buyer’s earnest money shall be nonrefundable, except as otherwise provided in this contract”. In a nutshell, if your lender drops the ball on dates and deadlines, you may lose your earnest money!
If you are financing the home purchase, your lender will require an appraisal by a licensed Colorado appraiser. Denver custom is that the Buyer pays the appraisal fee and the lender typically chooses the appraiser. The Contract provides “outs” for the Buyer should the property not appraise at or exceed the purchase price, as long as it is completed by the appraisal deadline and with written notice and provided by the due date to the Seller/Seller’s agent.
Evidence of Title and CIC Documents
A “title-commitment”, almost always paid by the Seller, is ordered early in the under-contact process and reflects the status of the title (via researching public records back to Colorado’s statehood!) along with a list of conditions that must be met prior to issuing title insurance.
- Information about the policy, property address, and involved parties.
- Establishes matters that must be provided or addressed prior to Closing.
- “Exceptions” or a list of matters that will not be covered in the policy.
- (Additional protection can be purchased with “owner’s extended coverage” as indicated by an additional box in the Contract).
It is critical to review the commitment and especially the “exceptions” prior to the “title-objections deadline” so as to decide if any portions are unacceptable to your continuing with the purchase. As usual, written notice must be given to the Seller prior to this deadline, should you wish to terminate the Contract.
The Contract allows for the Buyer to make the purchase contingent on the survey as either an “improvement survey plat” or an “improvement location certificate”. New construction typically requires the latter but either may be needed if required by the lender or the title insurance company. The “improvement location” survey is not a staked survey, so if you are considering improvements to the property, it may better serve you to order a full survey.
CIC (Common Interest Community) Documents are for homes/condos/townhomes located in a common interest community. If the home you are purchasing falls under this category, it is wise to make the contract contingent on a thorough review of these documents. These CIC documents will give you a snapshot of the financial health of the association. The Seller pays for the documents to be distributed to the Buyer and they must be delivered to you prior to the date indicated on the Contract. Furthermore, should you have any concern; you must provide written notice to the Seller on or before the “CIC Documents Objection Deadline” to terminate the contract.
The Seller must provide a signed “lead-based paint” disclosure in homes permitted prior to January 1, 1978, before parties sign the Contract.
Property Disclosure, Inspection, Indemnity, Insurability, Buyer Disclosure
And Source of Water
The Seller must disclose “latent defects” but is not required to provide a Sellers’ property disclosure. In Denver, unless it is a bank-owned or an investment property, Sellers usually complete the property disclosure checklist and return for the Buyer’s review prior to the date indicated on the Contract.?Hiring a home inspector is common practice in Denver. Home inspectors are not licensed in Colorado, but I work with several extremely knowledgeable ones. Home inspections usually cover the mechanics of the property, such as electricity, roof integrity, plumbing conditions, and identify health and safety issues. Depending what is uncovered, the home inspector might recommend additional services from a structural engineer or roofer.
Additional items that a Buyer may want to consider having tested as part of the inspection include:
- radon testing
- sewer scoping
- lead-based paint testing
- mold testing (while Denver is a semi-arid State, mold sometimes surfaces and is becoming more common under structural wood floors)
- evidence of bentonite (expansive clay soils that are common in some areas of the Denver Metro area).
Back to the Contract
Assuming the Contract is contingent upon inspection, the home will be inspected prior to the inspection deadline in the Contract. I will be present at the inspection, and once it is completed, you will review it and decide:
1. That the current condition of the home is acceptable and you will proceed with the Contract.
2. Proceed with “a notice to correct” identifying the list of unacceptable conditions.
3. Terminate the Contract.
In the last two choices, notice must be in writing and delivered to the Seller/Seller’s agent on or before the “inspection objection deadline”. Typically, the second choice is employed and the negotiation process begins again with the Seller, in an attempt to reach agreeable terms by all parties by the “inspection resolution deadline.”
In the event that terms are not reached within all of the deadlines, the Buyer is entitled to the return of his/her earnest money funds. Indemnity is also included in this section and indicates that it is the Buyer’s responsibility to pay for all inspections, tests, and surveys ordered by the Buyer. Additionally, the purchaser is responsible for any damage to the property as a result of work performed by said individuals. Furthermore, the Buyer agrees to “indemnify” the Seller from any damage, liability, and/or expense incurred by the Seller for the indicated work.
Insurability simply states that the Contract is conditional on the Buyer’s ability to obtain property insurance that is acceptable based on “availability, terms, and conditions of and premium for property”. Objections must be received in writing on or before the “property insurance objection deadline”. Buyer’s Disclosure represents whether the Buyer does or does not need to sell and close on another home to complete the present transaction. _The Source of Water finishes this section and identifies whether the Buyer acknowledges receipt of the “Seller’s Property Disclosure or a “Source of Water Addendum “as well as receipt of the current well permit. A box is indicated to note there is “No Well”.
Closing/Transfer of Title/Payment of Encumbrances
This indicates that the deed from the Seller to Buyer will occur on the day of close and specifies the date. This portion also identifies the type of deed to be conveyed at Closing (General Warranty Deed is the most common for non-bank-owned homes). Lastly, it notes that any encumbrances needing payment must be paid at or before Closing.
Closing Costs, Documents, and Services
This section describes that all parties must have “good funds” on all costs with respect to the Closing. It outlines whether the Buyer or Seller pays or it is split between parties into the following items:
- Closing Cost Services Fee (different from the lender Closing costs)
- Status Letter and Transfer Fees (in regards to Associations)
- Applicable sales and use taxes
Pro-rations – Property taxes (paid in arrears in Colorado), rents, association assessments, water and sewer charges, and interest on continuing loan are identified and note who is responsible for each section.
Possession – Identifies the date and times that the Buyer can take possession and outlines repercussions should the Seller not have vacated the home by this time. This section also makes notice of whether the Buyer will occupy the home as a principal residence.
Insurance; Condition of, Damage to Property and Inclusions and Walk-Through
The “casualty insurance” section explains that in the event of damage to the inclusions and/or property, and if damage costs are not more than 10% of purchase price, the Seller must make the repairs prior to Closing or the Buyer can elect to terminate the Contract with written notice. If the Buyer wants to proceed with the purchase knowing of such damage, he/she is entitled to the Seller’s insurance proceeds on the damages in the form of a credit to the Buyer at Closing.
The “damage, inclusion and services” explains that the Seller is liable for replacement of any inclusions or services that fail or are damaged between the time of Contract and the time of Close or “possession”, whichever is first. The replacement does not need to be new and rather is defined by a “unit of similar size, age, and quality, or an equivalent credit”. Finally, the Contract notes that home warranty programs are available for purchase and may cover the repairing of identified inclusions. The last section allows for the Buyer to complete a final “walk-through” prior to Closing as confirmation that the home’s physical condition is in compliance with the Contract.
Recommendation of Legal and Tax Counsel
As outlined in the previous section, the Colorado Real Estate Commission mandates that all real estate agents recommend said legal review and/or counsel prior to signing the Contract or when reviewing title work or any other matter.
Time of Essence, Default, and Remedies
This section explains that there are two remedies available, should the Buyer fail to perform any portion of the contract, including not honoring any payments or failing to provide earnest money as agreed to in the Contract. The two remedies include “Specific Performance” and “Liquidated Damages”. In the Denver area, the later is usually indicated. Additionally, should the Seller be in Contract default, the Buyer may elect to 1) treat the Contract as canceled and have the earnest money returned along with any other proper damages or 2) treat the Contract as in full force and have the right to specific performances and or damages. If anything relating to the Contract should end up in court or arbitration, the losing party is responsible for reasonable costs, expenses, legal fees and attorney fees.
Parties agree to mediation to address any unresolved disputes prior to or after Closing. Mediation shall be in “good faith” and shall terminate 30 calendar days of the date of written notice asking for mediation, should a mutual resolution fail to be resolved.
Earnest Money Dispute
This paragraph includes a full explanation of consequences to the Seller and or Buyer in the event of controversy pertaining to which party is entitled to the earnest money.
All parties are relieved of the responsibility of the Contract should the Contract be mutually terminated.
This section adds conditions, e.g., a contingency to sell a home, and a host of other information that has not been approved by the Colorado Real Estate Commission.
This section reminds the Buyer and Seller of their obligation to act in “good faith”.
Entire Agreement, Modification, and Survival
This explains that the Contract and all items pertaining to the contract must be in writing to be enforceable.
Foreclosure Disclosure and Protection
This section provides boxes to indicate whether the property, as per the “Seller’s current actual knowledge”, is or is not in foreclosure.
Notice of Deliver, and Choice of Law
This describes the choices regarding how the Contract and additional items pertaining to the Contract can be delivered. Choices include either physical or electronic delivery (fax, e-mail, or none). It further states that the Contract and any disputes shall be “governed in accordance with the laws of the State of Colorado”.
Notice of Acceptance, Counterparts
The offer shall expire unless it is signed, offer and acceptance, at or before the acceptance deadline date and time.
Although not part of the Contract to Buy and Sell Real Estate, they are typically filled out at this time.
Please note that this is a very basic overview provided for educational purposes only. This is not intended nor does it imply any sort of legal advice. Furthermore, this summary is based on the 2008 Contract to Buy and Sell Real Estate, and the Colorado Real Estate Commission makes yearly revisions.