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December 1, 2021
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Understanding Colorado’s Real Estate Contract

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’re knees deep in an actual transaction.  In this post we’ll show you the contract that’s often used in Colorado and walk you through a few of the key points.  The more you understand going in as a buyer or seller the better your chances of a smooth and 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 might purchase or sell the property is the Colorado Real Estate Commission’s (“CREC”) Contract to Buy and Sell Real Estate (Residential).  Although there are a few exceptions, 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.  You can review an example contract here.

Before we dive into several of the agreement provisions, a quick disclaimer.  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 below may – or may not – apply to your transaction, may apply in a different way, or may even be interpreted differently. 

Also, purchasing a new build home directly from a builder is a different animal, and this contract likely does not apply to your deal.  If that’s the case, you may find value in this post: “7 Things to Know about New Home Contracts”. 

Last but not least, this post is not comprehensive, is not legal advice, and should not be relied upon.  Also, the CREC contract changes every year, so this post may not apply to the version of the contract you use. 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 2021 version of the residential CREC Buy and Sell contract:

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 contract. These sections discuss what the seller and/or purchaser can and/or should include (Section 2.5) or exclude (Section 2.6) from the deal. For example, items like washers and dryers, televisions, furniture, other personal property, fixtures, and other items might be listed in either section.  It’s easy to forget all the little things 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!

Section 3 – What’s the deadline again?

The Colorado Real Estate Commission did everyone a favor by including a spreadsheet-style grid in the contract 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 of these deadlines, be sure to also lean on your real estate broker 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 a purchaser submits with the offer (or immediately after the offer is accepted) and is usually held by a third party such as the title company tasked with closing the transaction. The earnest money shows the seller that the purchaser is serious about purchasing the home. The earnest money is applied towards the purchaser’s purchase price at closing, and if the purchaser terminates the deal the contract will dictate who receives the earnest money.

Perhaps one of the bigger misconceptions we run into here at Focus Real Estate is whether the purchaser’s money is refundable if the purchaser terminates the contract.  The answer is simple for many transactions – if the seller or purchaser validly terminates the contract before one of the applicable termination deadlines in the contract, generally the earnest money will be refunded to the purchaser.  This is deal specific though, so understand your earnest money rights and when your earnest money 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 a purchaser may be able to terminate the agreement and walk away from the transaction (often with their earnest money).  In short, make sure you understand all the financing details and deadlines 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.  In our experience loan issues are the #2 most likely area where a transaction will fall apart.  (Keep reading to learn about the #1 issue!)

Section 6 – What if my home doesn’t appraise?

As part of many transactions, the purchaser will obtain an appraisal from a third party appraiser.  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 – purchasers and sellers don’t have much if any input on the appraisal to help ensure it’s as fair as possible.

So how does all this fit in with Section 6?  In a hot real estate seller’s market bidding wars tend to 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 potentially terminating the contract – may come into play.  A low appraisal may not result in deal termination, but it can re-open negotiations between the purchaser 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 purchaser’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/bylaws/governing documents, 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 contract.  We won’t go into too much detail 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.  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 all relevant inspections are completed (some homes might need additional inspections/experts involved), purchasers will have the opportunity to ask the seller for either a concession or for the seller to repair any issues that were discovered.

How much can a purchaser ask for? What should a seller repair?  Again, all this depends on the status of the market and who holds the leverage.  Your agent can help you figure out where you stand 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 contract related to inspection and other diligence matters.  Inspections are the #1 area where deals are most likely to fall apart, at least based on our experience!

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 Central Park when a home is sold the parties (it could be either buyer or seller – it’s negotiable) have to pay the Central Park Transfer Fee which in 2021 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 brokers or attorneys, at the direction of their clients, 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 (please consult with your broker or attorney – don’t use these clauses!).

So there you have it – those are our thoughts on just a few key provisions in the residential CREC Buy and Sell contract!

Alex R. Ross, Esq. of Nemkov Brunger McLeod PLLC contributed to this Scoop post.

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