If you’re thinking about buying or selling a home in Colorado we think it’s a good idea to get comfortable with the contract you’ll likely use before you get in the heat of the moment in the actual transaction. In this post we’ll show you the contract most often used and walk you through the key points. The more you understand going in as a buyer or seller the better your chances of a smooth & successful transaction.
If you’re considering purchasing or selling a resale home (meaning an existing home rather than a new build home) in Colorado, the agreement under which you’ll likely purchase or sell the property may be the Colorado Real Estate Commission’s (“CREC”) Contract to Buy and Sell Real Estate (Residential). Generally, real estate brokers in Colorado are required to use CREC-approved forms for their residential real estate transactions – including the Buy and Sell agreement. As a result, this agreement is a common form of residential purchase agreement, and understanding several of the key provisions in the agreement can be important. This contract will be the focus of the blog post and you can review an example contract here as you read along.
Before we dive into several of the agreement provisions, a few quick notes. First, the agreement is updated from time to time. For example, there are more than 5 new changes on the table for the 2019 version of the agreement. So the agreement and its terms aren’t static (even if this Stapleton Scoop post is)! Second, all real estate transactions are different, and all real estate contracts are different. Even if your real estate broker uses the CREC agreement for your deal, some of the terms we discuss may – or may not – apply to your transaction, may apply in a different way, or may even be interpreted differently. Third, if you’re considering purchasing a new build home directly from a builder this contract does not apply to you and “7 Things to Know about New Home Contracts” is a better blog post for that particular situation. Last but not least, this post is not comprehensive and is not legal advice and should not be relied upon. You’re responsible for your own agreement – so read it and get the necessary legal help you need!
And now, here are our thoughts on a few key provisions in the current version of the residential CREC Buy and Sell agreement:
Sections 2.5 & 2.6 – I’m buying the house … but what exactly is included?
It’s always wise to pause on Sections 2.5 and 2.6 of the agreement, which are the sections where the seller and/or purchaser can and should include (Section 2.5) or exclude (Section 2.6) items like washers and dryers, televisions, furniture, and other personal property, fixtures, and items as part of the transaction. It’s easy to forget all the little items you might want with the home if you’re the purchaser, and if you’re the seller, you might forget that you didn’t want to include, say, a special light fixture that’s a family heirloom. Make sure everyone is on the same page about what’s included and not included! Note: Section 2.5 and the transfer of personal property could change as part of the 2019 updates.
Section 3 – What’s the deadline again?
The Colorado Real Estate Commission did everyone a favor by including a spreadsheet-style grid in the agreement that lists many of the deadlines you need to be aware of. Your real estate broker will typically help you manage these deadlines and help you protect your rights. There can be dozens of different deadlines associated with a typical residential real estate transaction in Colorado, so while you need to be aware and manage these yourself, be sure to also lean on your real estate agent for guidance and a second set of diligent eyes.
Section 4.3 – Earnest Money
In Section 4.3, the seller and purchaser specify what the earnest money for the deal is. Earnest money is the money that the buyer submits with the offer, usually held by a third party such as the title company tasked with closing the transaction, to show the seller that they are serious about purchasing the home. The earnest money is applied towards the buyer’s purchase at closing and if the purchaser terminates the deal the contract will dictate who receives the earnest money at that point, the buyer or the seller.
Perhaps one of the bigger misconceptions we here at Focus Real Estate run into is whether the purchaser’s money is refundable if the purchaser terminates the agreement. The answer is simple for many transactions – if the seller or purchaser validly terminate the agreement before one of the applicable termination deadlines in the agreement, generally the earnest money will be refunded to the purchaser. This is deal specific though, so understand your earnest money and when it becomes at risk in the transaction.
Section 5 – Uh oh, my lender isn’t responding!
Section 5 discusses both the purchaser’s and seller’s obligations related to applying for and obtaining a loan. As you might expect, many residential real estate transactions are financed by the purchaser in some way (as opposed to the purchaser paying cash for the property), and many lenders can be a bit unique in terms of everything from responsiveness to questions from the purchaser to locking in interest rates to underwriting requirements. Section 5.2 can be particularly important in some transactions, as that can be one of the potential “outs” for a purchaser – in other words, it can be one of the ways the purchaser may be able to terminate the agreement and walk away from the transaction (often times with their earnest money). In short, make sure you understand all the financing details and deadlines up-front for your transaction. Even if a delay is caused by a lender you as the buyer are responsible so you need to stay on top of your loan. Loan issues are the number two most likely area where a transaction will fall apart. (keep reading to find the number one area!)
Section 6 – What if my home doesn’t appraise?
As part of many transactions, the purchaser will obtain an appraisal from a third party expert. An appraisal is simply an independent valuation of a property, and it’s often part of the purchaser’s loan closing process. We won’t bore you with too many details about the world of appraisals and why they exist, but the short story is lenders don’t want to lend purchasers more money than a home is actually worth in case the lender has to foreclose and sell the home. To protect themselves from loaning more to a purchaser than the collateral is worth, lenders want to see what a non-biased appraiser values a property at before closing on a loan. The lender always initiates the appraisal process, buyers and sellers don’t have any input on it to maintain a fair process.
So how does all this fit in with Section 6? In a hot real estate market like the one we’ve seen in Denver the past few years, bidding wars occasionally drive purchase prices above list prices. When a purchaser offers above list price for a home, it can increase the odds that the home won’t appraise for what the purchaser is offering. Or sometimes a home might not appraise if it sells for list price or even below list price. Regardless, if there’s a gap between the appraised value of a home and the purchase price of that home, a purchaser may have financing issues, and Section 6 – and agreement termination – may come into play. Often times a low appraisal may not result in deal termination, but it can re-open negotiations between buyer and seller regarding the price that must be paid for the home. Who wins these negotiations? It depends on the status of the market (is it a buyer’s market or a seller’s market?) and the individual motivations within that transaction as to which party wants to get the transaction done and which one would be willing to walk away.
Section 7 – HOA Issues
Section 7 applies if the property being sold is subject to a HOA or a similar organization. If this section applies to your transaction and you’re the purchaser, be sure to review the HOA documents, such as the declaration, the rules and regulations, and so on – prior to the deadline. If you’re purchasing and thinking about, for example, adding an outdoor storage shed, or you want to lease the property either short term or long term, or have other unique requirements or ideas about how you might use the property, the HOA documents can be key and should be reviewed in detail.
Section 8 – Title & Title Insurance
If you’re purchasing a property, you want to make sure the seller conveys clear title to you. This can be a complicated area, and your title company, lender, real estate broker, and/or attorney can help you with the sometimes simple, but sometimes very convoluted and difficult process of conducting diligence on a property’s title and identifying issues, such as liens, easements, and other matters that might impact the purchaser’s ownership of the property. As for Section 8, the short story is that the purchaser will want to conduct thorough diligence of title matters – both those of record and those not of record – and if there are any issues, the purchaser may be able to terminate the contract.
Section 10 – Inspections & Diligence
Under Section 10.1, the seller typically delivers to the purchaser the most current version of CREC’s Seller’s Property Disclosure form. In this form, the seller discloses property matters the seller is aware of. Similarly, under Section 10.2, the seller is required to disclose latent defects the seller is aware of.
Most sellers and purchasers are familiar with the home inspection process, which is also addressed in Section 10 of the agreement. We won’t go into too many details concerning the diligence and inspection process in this Scoop post given how detailed the process can be and the breadth and depth of issues, negotiations, and so on that relate to home inspections and the purchaser’s diligence of the property and anything else that affect the property. Suffice to say if you’re the purchaser you’ll want to have a professional home inspector conduct a thorough inspection of the property, including a scope of the sewer line to check for issues. Once that is completed buyers have the opportunity to ask the seller for either a concession or repairs for items that were found. How much can a buyer ask for and who will win in the negotiation of these items? Again, it depends on the status of the market and who holds the leverage. Your agent can help you figure out where you stand in those negotiations and what you’re likely to be able to negotiate based on their experience. If there are “game changer” type problems that could potentially blow up the transaction you’ll need to carefully manage your way through the deadlines in the agreement related to inspection and other diligence matters. Inspections are the number one area where deals are most likely to fall apart.
Sections 15 & 16 – Closing Costs & Pro-rations
Make sure you’re comfortable with the potential closing fees and other costs and expenses associated with closing your transaction, as well as how and what fees will be pro-rated through closing. Your lender is your best resource for providing you this information and will do so when they send out their disclosures to you once you’re under contract. It can be confusing though, so ask questions! As just one example of fees that a purchaser might not expect are community or HOA transfer fees. For example, in Stapleton, when a home is purchased the parties (it could be either buyer or seller, it’s negotiable) have to pay the Stapleton Transfer Fee which is equal to “Purchase Price less $100,000 *.25%”. Review this section carefully!
Section 30 – Additional Provisions
Continuing with the theme that all real estate transactions are unique, it’s not uncommon for a home sale transaction in Colorado to include additional provisions in Section 30. Additional provisions are often drafted by either realtors or attorneys and can address or relate to almost any topic. If any additional provisions are included in your CREC agreement, please read these carefully and consult with your attorney if you have any questions. We put a few example clauses in our contract we linked to above so you could see a few.
So there you have it – those are our thoughts on a few key provisions in the residential CREC Buy and Sell agreement. Wanna learn more? Check out the 9 Keys to Buying a Home resource below. It’ll guide you through the buying process from A-Z!