Real Estate Contract Process
The real estate contract process in Colorado is a systematic process that seems like it should always go as planned. However, because these transactions are very long with many steps along the way there is a lot of room for variability. In order to be prepared for each step of the transaction it is important to understand the overall flow from offer through inspections and the many steps in between.
Fundamentally the Buyer and Seller Processes are very similar. That is because each party adheres to the dates and deadlines associated with each step in the process. However, the responsibilities vary between each party. Both parties review the offer, move into inspections, review title work, etc. but the responsibilities of each are the big difference.
This is the big first step where the Buyer and Seller officially ‘meet’ in the transaction. The Buyer has seen the home and had a valuation from their agent so that they understand how the property is priced and why. This information is used to construct their offer. All of the following items listed on this page are considered in the construction of the offer. How each of the items below are tweaked presents a story of who the Buyer is and how they intend to conduct the transaction for the Seller. I like to consider the offer an initial handshake between Buyer and Seller as they embark upon this business transaction over the coming weeks.
The earnest money is very important in both the Buyer and Seller Process. That is because this is the ‘skin in the game’ that the Buyer offers to the Seller in order for them to take the property out of ‘Active’ status on the MLS. When a Seller changes to one of the under contract status on the MLS it indicates that they are moving through the process in an effort to sell their home. This generally turns the other Buyers away as they don’t feel like there is a strong chance to buy. Therefore the earnest money represents the opportunity cost for the Seller. At first, the stakes are very low and the Buyer has most rights to receive the return of the money. As the contract progresses and the Buyer passes each step or deadline the earnest money becomes more hard until finally at the end of the transaction the pendulum swings in favor of the Seller. If the property has been off the market (designated as Under Contract) as the Buyer moves through the process passing the dates and deadlines, and then for whatever reasons the Buyer cancels the earnest money is likely to be considered the property of the Seller. That is the earnest money is the value of the best alternative forgone for the Seller. This is also price that the Buyer must pay for locking up the sale and not completing the transaction. The best alternative for Buyer and Seller would have been to complete the transaction. However, if the Buyer doesn’t complete the transaction the earnest money is the second best option therefore the opportunity cost.
There are all kinds of disclosures that need to be presented from the Seller to a Buyer at the start of the real estate transaction. These documents help the Buyer understand the condition of the property, size and even where the water is sourced for the property. There are so many variables that could happen. For example, if the property was built prior to 1978 there is a Lead Based Paint disclosure that must be presented. That is because of the obvious health problems that lead based paint can present if ingested. If the Buyer has small children this can be especially important as the youngsters might put a flake of paint into their mouths if found on the ground. Another disclosure that might seem obvious but can actually present complications if not accurate is the Source of Water Disclosure. For most people who live in cities this disclosure is very obvious with the local government being the source of water. However, for rural properties throughout Boulder County and up into the mountains this might not be the case. There could be a well or cistern supplying water to the property. There are even some cases where there is NO reliable source of water with the primary mode of delivery being by truck. This would be very important to clearly understand before closing on a property and calling it home! One of the most important disclosures for the Buyer is called the Seller’s Property Disclosure. This 7 page document is completed by the Seller and asks them all sorts of questions about the condition of the home. This becomes the first indication as to the condition of the property as well as how the home is heated or how the sewage is handled. If there is a septic system it is important to note that in this document as well as provide the Smart Septic certification, as required throughout Boulder County. Any major problems within the home while in the Seller’s possession should be disclosed here with documentation on how the problem was mitigated. This often comes up with properties that were effected by the floods of 2013. If the property sustained damage you would want to know who was responsible for drying out the property and how it was done.
The home inspection is one of the most important steps in the Buying and Selling Process. When I work with Buyers and Sellers I say that the first major round of negotiations is when you go under contract. The second most intensive round of negotiations happens around the inspection. The home inspection allows the Buyer to inspect the home in any way that they feel is best. Scheduling the Inspection as soon as possible is critical – it is the first step in the process, so all the other deadlines depend on getting the Inspection completed. Having a few days between the initial inspection and the objection deadline allows you to bring in any specialists that might be required for a second opinion. At a minimum we always suggest a Home Inspection, Sewer and Radon Test. These should be done by licensed professionals. The Home Inspector will give the house the initial ‘once over’ to confirm the overall function of the home. The sewer test is important to understand how the waste from the house will be delivered to the main city line. Moving soils in Colorado, the age of homes and even how new homes were constructed all play a part in moving or breaking this main connection to the city. If this is broken or damaged it can be thousands of dollars to repair. The simple test is only about $100-$200 to complete; money well paid considering the risks.
- Google the property to see if any crimes or other information is noted online.
- Consider asking the police station about crime rates in the area. They will also have resources about sex offenders.
- Knock on the neighbor’s doors to see if they enjoy the neighborhood or have specific concerns. These are also good people to ask about the home you are buying. See if they know of anything unusual about the property including if there are any encroachments from fences, etc. onto or out of property boundary lines. If there was an unusual situation with a crime in the house, the neighbors would know.
- Call the city to confirm the existence of any permits, or incomplete permits.
If the Buyer finds anything that they object to they have the right to simply terminate the contract by the objection deadline and receive their earnest money back. However, that is rare and doesn’t often happen. What normally happens is the Buyer collects information about the differed maintenance or health and safety concerns regarding the house and compiles them into an objection document that is presented to the Seller. This is where the next big round of negotiations occurs. If the Buyer and Seller can come to the middle and resolve their concerns a final document is required called the Inspection Resolution. However, depending on the terms of the agreement between Buyer and Sellers there are other alternatives to formalizing the agreement. This could include withdrawing the Inspection Objection and documenting the agreement on an Amendment. It is also not unusual to see an Amendment in addition to the Inspection Resolution. This is where the expertise of your REALTOR comes into play! They are advocates for Buyer and Seller and their experience is proven in this step.
It is important for the Buyer to provide the Seller with the HOA documents for their community, if applicable. As the Buyer, it is important to understand HOA documents. The Buyer has a responsibility to review these documents to confirm their acceptance of the rules. They should also be able to understand of how the HOA is funded, as well as if there are any special assessments coming up. The documents that that a Buyer should provide a Seller include:
- Covenants (all the rules and regulations)
- Meeting minutes for the past 6 months
- Financial statements for the past 6 months
The meeting minutes and financials are important, too. The financials will show how the HOA is funded so that the Buyer understands their ability to deal with any special assessments that may occur. Additionally, the meeting minutes will allow you to see if the HOA is discussing the need for any special assessments. If the HOA isn’t funded and has a special assessment coming up the Buyer would want to be aware as it could be the responsibility of any homeowner to pay if the HOA doesn’t have the money to achieve its goals. If there are items in these documents that the Buyer objects to they can cancel the contract, or find a solution on how to resolve the problems.
The next step in the home buying process is for The Buyer to obtain a quote regarding Insurance for the property. The right to review and object to the availability, terms and conditions of and premium for the property insurance is included in the Contract to Buy And Sell Real Estate. If the Buyer agree to the terms provided by your insurance specialist there is nothing further to do. However, if there is a specific insurance rider that is required on the property (example, flood or fire) that causes the monthly premium to exceed the comfort level of the Buyer they have the right to cancel the contract.
Click to see an explanation of what title insurance is and how it protects homeowners.
Title Review & Off Record Matters
The opportunity to review title is very important to the Buyer. They need to understand who has a claim against the property that would need to be cleared before taking posession. Most properties have a claim against the property from the Mortgagee (Lender) to the Mortgagor (the Homeowner). This is easily cleared up when the new Buyer’s Lender pays off the Seller’s mortgage. However, there are many other instances that might crop up and put themselves ahead of the new Buyer in ownership of the property, thereby causing their ownership to be in jeopardy. The issuance of title insurance helps prevent these problems from occurring.
The title company is responsible for delivering the title documents. However, the Seller is responsible for delivering any ‘Off Record Title’ occurrences that they have knowledge of. This is not something that is often seen disclosed, because it is rather unusual but there was a very real instance that we saw Sellers being required to disclose in the recent past. This was the issue around Subdivision Paving in unincorporated Boulder County. Before this became recorded on the public records the indication that this was happening was presented to Sellers in the form of letters and media communication. Sellers were then required to disclose to potential Buyers that this was coming and that there would be an additional assessment on their land to accommodate the subdivision paving. Ultimately this ballot issue was overturned and the residents who paid the tax were refunded, but regardless its a great example of off record matters that the Seller has knowledge of before going on public records that is required to be disclosed to the Buyer.
Due Diligence Documents
Due Diligence Documents are requested at the time the offer is presented from Buyer to Seller. If the Buyer has specific documents that they want to have more information about this is where they are requested. For example, if the public records shows that the basement is not finished but upon their initial preview it indeed was finished that would be an indication that the basement might not be permitted with the city. Therefore the quality of construction may be sub-par. The Buyer would then ask the Seller to present permits for the work completed. If the Seller cannot present the documents it would be an opportunity for the Buyer to back out of the contract, if they wanted. If the Buyer does not want to back out of the contract the Buyer might want to schedule to have professionals inspect the work to confirm that it is done to city codes.
Other due diligence documents that the Buyer might want from the Seller may include previous inspections. If the property was under contract and then became active and available for purchase on the market again the new Buyer might want to see exactly what the previous Buyer found. If there was something in the inspection that caused the previous Buyer to back out the new Buyer could ask their inspector to look specifically at those items and call in specialists for second opinions.
These are the final steps in the contract process. You are through the vast majority of the contract and are now on your way too Appraisal and Loan Conditions. These deadlines are the last hurdle in the contract.The appraisal is the first step of this last step. If the property does not appraise for the value of your contract the Buyer needs to object by the deadline. There are many ways that this can be solved. Normally the Buyer and Seller return to the negotiation table to determine how to deal with the deficiency in appraised value versus contract price. The Seller might agree to lower the price to the appraised value. However in the recent years when competition is so intense we often see Buyers waiving the appraisal condition. This is allowable of the loan the Buyer is obtaining is convention (it is not allowed by FHA loans). The Buyer then brings the difference between the appraised value and contract price to the table.
Here at TrailRidge Realty we will work with the appraiser to review comparable sales and help ensure that the property appraises for the contract price. We cannot guarantee that the appraiser will see eye-to-eye with us, but we can try our best to make their job easier by presenting data and explaining the nuances of the neighborhoods that the appraiser might not be familiar with. We create an appraisal package complete with the comps, any competing offer information as well as the appraisers own Form 104MC Data report. This report shows the appraiser how the neighborhood has been appreciating over the past 7-12 months, 4-6 months, the past 3 months and finally over the past year. The data contained includes inventory analysis, which helps the appraiser get an idea of demand in the area, as well as average and median home prices. This step is conducted for both Buyers AND Sellers who work with TrailRidge. That is because in this competitive and escalating market all property is on the rise and sometimes it isn’t apparent to the appraiser. This step is critical in the contract process and the other big area where your REALTOR’s experience is critical.
When it is confirmed that your property has appraised the final step in the lending process is the Loan Conditions. This step is confirmed between the Buyer and their Lender. Together they discuss if underwriting needs any further documentation to confirm the funding of the loan. If there is anything that the Buyer cannot provide to the Lender to confirm funding on the loan, this is the time to cancel the contract. This is also the Buyer’s opportunity to review the terms of the loan, interest rate and payment. In the sole discretion of the Buyer they have the opportunity to accept or reject the loan and its terms.
YOU MADE IT! This is the big day! Its important to confirm that the utilities are turned on by the Buyer and off by the Seller in preparation for the transfer of ownership between parties. Remember, the title company always transfers the water/sewer. That is because this is the one utility that can become a lien on the property. Title’s responsibility in providing the title insurance is to ensure that no liens are on the property at the transfer of the deed so they take on this task.
Wire transfers for each party should be aligned before going to the closing table. This includes a wire transfer for the Seller to direct any Seller Proceeds into their account at closing. The option is to receive a cashier’s check, which the bank will hold for up to 10 days after closing before releasing funds. A wire transfer is immediately available. The Buyer may elect to wire transfer their down payment to the title company rather than bringing in a cashier’s check.
Remember to bring your identification to the closing table, as well! Take a moment to confirm that it isn’t expired and if it is, either do your best to renew it before closing or bring another form of valid identification such as a passport.
Click to read about Drew Smith. He was born and raised in Boulder County and has been serving home buyers since 2011. Home Buyers will appreciate his attention to detail and patience through the real estate process.