Understanding The Basic Terms In A Real Estate Contract

This week we want to take the opportunity to review a few of the basic terms of Colorado Real Estate Contracts. It is beneficial to have general knowledge of these agreements, as most of us buy or sell a home at some point in time. By understanding the general terms and language of the contracts, both buyers and sellers will be more prepared for future transactions. This is intended to be a very brief description.

There are two parties in a Colorado Real Estate contract: the buyer and the seller. From the seller’s standpoint, there is less flexibility. Once the seller has accepted an offer they have committed to sell the property, and there is no right to get out of an agreement unless it is previously written in the contract.  This is referred to as specific performance. The seller may take back up offers in the event the first offer falls through.

In our state, real estate contracts are more buyer-friendly.  Included in a standard real estate contract is a “liquidated damages” clause, which states that the most the buyer will lose if s/he backs out of the contract is the earnest money.  The buyer in good faith may terminate the contract under certain contingencies, and receive their earnest money in return, but if the buyer does not complete the transaction following the contingency periods, they may lose their earnest money.

At various stages in the transaction, issues may arise that give the buyer the option to modify the contract, or possibly to terminate the contract. In real estate transactions, these situations are commonly called contingencies. Some of these major contingencies for a buyer are the following:

1) Title Review—the title review includes both requirements for delivering clear title, and exceptions to title, which are property rights that are no longer attached to the property.  For clear title,  the property must be deeded correctly, all debt must be paid off, and if there is a tax lien it must be cleared.  The exceptions to title include any property rights legally conveyed or sold. Common examples are easements, which are rights that others may have to be on the property or work on the property, and CCRs (covenants, conditions, and restrictions), which are requirements that owners agree to abide by.  There are many other exceptions to title not listed here.

2) Inspections—Buyers have the right in the Colorado Real Estate Commission contract form to inspect the property at their cost.  Property inspections may include the improvements to the property (ie. Buildings), the land, or other things which may impact the enjoyment of living on the property, such as noise levels, future impacts to the neighborhood, etc.  The buyers typically have three choices following the inspections, they may terminate the contract, they may accept the property as-is, or they may give a written objection for sellers consideration to resolve inspection issues.  Sellers are not required to make repairs or offer a different negotiated price, but often they will to move towards a successful closing.

3) Insurance (especially fire)—sellers should be sure they may obtain property insurance , espcecially for properties with improvements. If the buyers can not get insurance, or the cost of insurance is higher than desired, they may terminate the contract.

4) Loan Approval—This contingency allows the buyer to terminate the contract, if they are not able to receive loan approval from their lender. Oftentimes buyers will be pre-approved and pre-qualified to purchase a home, but the lender must still give the final loan approval. As a note, buyers should refrain from any additional financial obligations prior to a closing. Sometimes lenders will deny a loan if a buyer quits a job or buys a car right before closing on a property.

5) Appraisal—the property value must be confirmed by an appraiser. While this is sometimes rather perfunctory, it is a necessary step and contingency, and for some properties, it is sometimes difficult to appraise them.

6) Survey—Most buyers want to be satisfied with a survey of the property, and especially to make sure there are no encroachments on the property, or the property does not encroach on to a neighbors property.

The above outlines some major contingencies and areas we encounter in Colorado real estate contracts, but there may be others.