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 because 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.
In our state, real estate contracts are more buyer-friendly. Included in a standard real estate contract is a “liquidated damages” clause, which says that the most the buyer will lose if she or he backs out of the contract is the earnest money.
The buyer in good faith may terminate the contract under certain contingencies, but if the buyer does not complete the transaction after the contingency periods, he may lose his 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:
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.
Inspections. Buyers have the right to inspect the property at their cost. Property inspections may include the improvements to the property (i.e., buildings), the land or other things that 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 after 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 toward a successful closing.
Insurance (especially fire). Sellers should be sure they may obtain property insurance, especially for properties with improvements. If the buyers cannot get insurance, or the cost of insurance is higher than desired, they may terminate the contract.
Loan Approval. This contingency allows buyers to terminate the contract if they are not able to receive loan approval from their lender.
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.
The above outlines some major contingencies and areas we encounter in Colorado real estate contracts, but there may be others.
Don Ricedorff is a Realtor at The Wells Group in Durango, and a past president of the Durango Area Association of Realtors. He can be reached at don@durangorealproperty.com.
