Understanding the contract, timelines and paperwork makes it easy to move forward.
Selecting a home to purchase is both exciting and scary—exciting to find just the right home but sometimes intimidating to sign all the contracts. However, when you understand the ins and outs of going under contract, you’ll feel more confident as you move forward with the home-buying process. This chapter helps you understand the decision-making process as well as the process of contracting to buy your chosen property.
Making a Decision
When it’s time to make an offer, our job is to give you options. We will research whatever data is necessary, role-play psychological reactions sellers may have to situations, calculate probabilities for outcomes, and then step back and let you decide. We can’t emphasize enough—you have to make the real-estate purchase decision yourself. Our job is to empower you with the information to make the best decision. This is one of the many ways in which we are different as realtors®. Our only inventory in real estate is our supply of relationships. We trust that you will eventually purchase a home, and we want to make certain that the extensive data we supply to you confirms the most appropriate decision possible.
Making an Offer
Once we find the home you wish to purchase, we will complete on-line research about the neighborhood and make some determinations about whether the price is reasonable and supported by the sales history of the property—what the sellers paid for it, how long it has been on the market, any price changes, etc. With this information, we will write and present your offer along with your earnest money to the listing agent or seller. If you are writing on a new home, the on-site sales representative will write the offer on a builder contract and deliver it to the builder for formal presentation and acceptance. All purchase contracts we write will be written on forms required by the Colorado Real Estate Commission and our Broker. The table on the next page summarizes the different documents included with a purchase contract. The entire Colorado Real Estate Contract is negotiable. All dates, terms, prices, values, trades, pro-rations and financial information are disclosed in this single document. It is a 14-page document for this reason. The Colorado Real Estate Commission recommends that buyers and sellers consult legal and tax counsel before signing any sales contract. We can refer you to a number of legal and tax professionals should you require their assistance.
The sales contract is date-driven, and the dates are supplied in the original contract. All dates and deadlines are specific and subject to negotiation. Because the buyer usually initiates the contract, it is important that the dates and deadlines accommodate your schedule. It is also good to find out when the seller would like to close, if possible. If you can guarantee the seller their preferred closing date, they will have one item in your offer that they really like. Correspondingly, you can negotiate on price.
Depending on loan status, lender, and buyer and seller motivation, contracts typically close in around 30 to 40 days, with 3 days being the fastest and 11 months the longest we have had for contract execution. We construct the contract with you using the following loose timeline:
First 7 days of contract
Loan Application Deadline
Seller’s Property Disclosure Deadline
Title Insurance Deadline
Document Request Deadline
Off-record Matters Deadline
First 14 days of contract
- Inspection Objection Deadline
- Inspection Resolution Deadline
- Property Insurance Objection Deadline
- Survey Deadline
- Off-Record Matters Objection Deadline
- Title and Publicly Recorded Document Objection Deadline
First 28 days of contract
- Appraisal Deadline
- Loan Conditions Deadline
After completion of all deadlines
- Closing Date
- Possession Date
Understanding the Paperwork
The documents that may be included with a purchase contract are summarized below. If you have any questions, please don’t hesitate to ask us or to consult legal counsel.
Contract to Buy and Sell Real Estate
Designated as either New Loan or Cash at Closing, this document is the Colorado Real Estate Commission Approved form for all Realtor-related real-estate purchases.
This document is an authorization of the Buyer and Seller to employ a title company to research title, provide title insurance, hold and disburse monies, and conduct the real estate and loan closing.
Seller’s Property Disclosure
This document provides a disclosure of the property’s known physical condition to the best of the seller’s actual knowledge and is supplemented by the Colorado Mold Disclosure, Lead-Based Paint Disclosure and, in the event of a corporate relocation sale, corporate addenda describing the condition of the property. Also falling under this category of disclosure would be Improvement Location Certificates, Building Reports, Engineering Reports, repair receipts and other documentation describing the property’s physical condition.
Square Footage Disclosure
Enforcement of Colorado Real Estate Law E-41, this document indicates the source of marketed measurements and who may or may not have measured the property. Buyer is advised that if precise square footage is of concern, it is the buyer’s responsibility to verify by the Off-Record Matters Deadline.
What is the Risk?
If the seller accepts your offer, it becomes a legally binding contract. Then you and the seller will be subject to “remedies in case of default” if you cancel the contract when you no longer have the right to cancel. Think of this as your wager, but a wager where you completely control the outcome. Because the contract gives you dates, opportunities and deadlines to investigate, object and terminate for everything, a default of contract should not happen. However, say you lie on your loan application to the lender—this would be a breach of contract, and the seller could exercise their default remedy. Another example of defaulting would be changing your mind about buying after all objection deadlines are exhausted.
When writing the contract, you can select liquidated damages or specific performance. Liquidated damages don’t sound like fun, but it is the “soft route”—the seller can keep your earnest money (your wager) and nothing else. Specific performance is the “hard route”—the seller can keep your earnest money and sue you for the purchase price and damages. Specific performance sounds risky for the buyer; however, you control the level of risk. If you have no intention of defaulting, the risk is low, and an offer written specific performance is perceived by the seller as a stronger offer than one written liquidated damages.
Presenting the Offer
When all dates, deadlines, prices and other information are determined, we will complete the purchase contract, review disclosures and addenda & supply a financial letter (some proof of assets in a cash purchase or a lender’s letter for mortgage financing). Then you sign the contract and we provide you with copies of everything you have signed.
We put all of the offer documents into a tidy ERA Shields folder along with our business card and your earnest money check. Earnest money—usually in the form of a personal or cashier’s check—is customarily 1 to 3% of purchase price (can be as little as $500 or as much as $50,000). This money represents your sincerity in the attempt to purchase and is totally refundable if the offer is not accepted. Earnest money is negotiable and is an important first impression made to the seller. The amount deposited is kept in an escrow account of the listing real-estate company and not turned over to the seller. Occasionally, earnest money is deposited with the title company.
When all documents are complete, we present the offer, preferably in person to the listing agent of the property. Whenever possible, we avoid faxing an offer. A professional presentation and an indication of cooperation and personality helps humanize the process. A handshake and a courtesy “look forward to working with you” sets the table for strong communication better than anything else. It also conveys certainty to the listing agent, an important commodity that helps you in the negotiating process.
Many offers are not accepted. Very few are rejected. Most offers that are not accepted are okay with the seller—with the exception of a few details. If the few details are sticking points, the seller will propose changes to the offer using a formal counterproposal. These could be small issues such as a title deadline or payment of a homeowner’s association fee. They could also be larger such as a different month for a closing deadline, a need to rent the property back from the buyer or a request for a higher purchase price. Any changes to the original contract go into a written counterproposal in which the seller provides you with a timeline for accepting their modifications. If you do, there is a contract. If not, there is not.
As a buyer, you can “counter the counter,” but until there is a precise meeting of the minds, there is no contract. Similarly, any change to a counterproposal must be done on a new counterproposal. While much of the negotiation is done between the other agent and us via e-mail, fax or phone, it is vital that we have the ability to put things in writing in an official, state-recognized form.
You’re Under Contract
Upon acceptance of the purchase contract, your earnest money is deposited in a trust account. A copy of the purchase contract is delivered to the mortgage lender, who performs the following:
• Orders an appraisal of the property from a certified appraisal company.
• Processes a credit report for the purchaser.
• Verifies the purchaser’s employment.
• Verifies the purchaser’s bank accounts or other monies necessary to close.
• Orders any required inspection and oversees any necessary repairs.
• Oversees that all conditions of the purchase and sale agreement are met before closing.
• Consolidates all of the above into a loan package that is presented to the loan committee for final approval.
• When final lender approval is completed, all necessary information is forwarded to the designated closing agency.
A copy of the purchase contract is also delivered to title company/closing agent. The Title Company performs the following:
• Orders commitment for title insurance (see discussion on Title Insurance).
• Oversees and coordinates solution of any problems revealed in the preliminary title report.
• Files documents to clear title of all liens, encumbrances, judgments, clouds on title, or easement questions.
• Verifies that all work orders are completed and re-inspected if necessary.
• Prorates any rents, taxes, or utilities to the date of closing.
• Prepares all documents and closing papers for buyer and seller to sign.
• Arranges for both parties to sign closing documents.
• Files all documents with the local government to close the sale.
• Upon closing, disburses funds per the closing instructions.
Completing Your Loan Application
All of the lender procedures are dependent upon your loan application, so once you are under contract to purchase a home, you need to finalize and submit your loan application as soon as possible. You will need to provide your lender with most of the information listed in the checklist below.
- Personal information | Name and social security numbers
- Current and previous addresses
- Employment information | Monthly salary and sources of income Information on employment and employer |
- Assets | Landlord/mortgage company information Source of down payment and closing costs Bank address(es), account numbers and approximate balances Value of assets (stocks, bonds, mutual funds, etc.) Net worth of businesses owned Information on automobiles, boats, campers, personal property or collectibles owned
- Liabilities | Confirmation of credit cards and installment loans
- Information on any other properties owned (rental, investment, second homes, etc.) Alimony/child support payments |
Once your loan application is complete, an underwriter will validate the information provided. When the underwriter has processed all financial information, the lender can issue a Loan Commitment. Please be advised that FHA and VA underwriting takes longer (30 days minimum and as much as 45 days) and has more stringent guidelines than conventional loans, so we will need additional time to close these loans.
The lender will usually charge you for the home appraisal and a credit report up front. These are part of your closing costs and will show as a credit to you at closing, or the items will show as POC, or “paid outside closing.” Again, VA and FHA appraisals will take longer, up to 15 business days from the date of order. Appraisal should occur after the home inspection.
Obtaining Homeowner’s Insurance
You will also need to obtain homeowner’s insurance for the property by the contract’s insurance deadline, which is usually within the first five to seven days under contract. Contact your preferred carrier or use any of the referrals listed below.
Select Insurance Services | Don Artice | 100 Fillmore St. 5th Fl, Denver 80206 | 303-808-4223
Farmers Insurance | Mark Dezuba | 4445 Northpark Dr Colorado Springs, CO 80907 | 719-649-0201
Title Q & A
Once you’re under contract, you will receive a copy of the title commitment and other relevant documents such as community covenants. It is important that you review these documents for accuracy and thoroughness, consult the title company and their counsel and, if necessary, seek review from an attorney of your choosing. The questions and answers below may also provide helpful information.
What is a preliminary title report?
When a property is sold or refinanced, the lender and/or buyer need a preliminary title report to see exactly what publicly filed documents and conditions pass with the subject property, such as: taxes on subject property, amount owing, amount paid and assessors parcel number; easements of record, if any; restrictions on subject property, if any; liens and/or judgments of record, if any; and confirmation that the owner of record is actually the owner.
What is title insurance and who pays?
Title insurance insures against loss or damage resulting from defects or failure of title to the property you are purchasing. Much the same as your auto insurance protects from loss to your auto, title insurance protects from loss to the title to your property. In most transactions, the seller will furnish, at seller’s expense, a standard policy. In many cases a lender will require a title policy of the buyer. This is usually less than $150 and should be included in your Good Faith Estimate of closing costs.
What does a standard policy protect against?
The seller transfers the title, and does so customarily by a general warranty deed, which is just that, a custom. In truth, it indicates that the seller guarantees over the entire existence of the land they have interest in. Not many sellers can realistically make such a claim. Therefore, the seller provides an insurance policy that in fact there are no defects and the title company takes on the liability. Generally speaking, this policy does the following: the correct property is correctly vested in your name; there are no defects, liens or encumbrances against your property that are of public record; there is a right of access to and from your property; title to your property is marketable; the mortgage lien on your property is valid and enforceable and the mortgage lien has priority over all other liens and encumbrances; and there are no statutory mechanics liens now of record against the property.
What is owner-extended coverage (OEC)?
OEC provides protection from rights, claims, discrepancies, liens, etc., which are not shown by the public records. Depending on the title company qualification requirements, OEC may be available for the purchaser to request as an option. Each title company evaluates each contract or property to determine what coverage can be offered.
What Can Go Wrong?
Really, anything and everything can go wrong. Here are a few examples.
• A foreclosure may have been improperly handled.
• A deed may have been signed by a person under age.
• A deed may have been made by an incompetent person.
• A deed may have been made under a Power of Attorney after the death of the principle and would, therefore, be void.
• A deed may have been made by a person other than the owner, but with the same name as the owner.
• An heir or other person presumed dead may appear and sue for an interest in the property, etc.
What Happen Should Defects Arise?
The title company will defend against covered, rising defects, will clear the title for you and will assure you of no loss from the proceedings at their expense. The fee associated with the policy is a risk mitigation fee: the title company researches the history and warrants its accuracy. If it is inaccurate, they take the loss so you don’t have to. If the title documents before the closing reveal a defect, you can object and request that the seller remedy the defect. If the seller is unable to remedy the defect, you may continue with the purchase or terminate the contract.
There are also exceptions to the title policy, which are different than defects, but certain exceptions could be as objectionable as defects in title. One example is underground mineral rights. Mineral rights in Colorado are owned separately from the surface estate. In rural areas such as Woodland Park, it is important to determine that the underlying mineral estate that is likely owned separately from the surface estate cannot be mined. In neighborhoods or in cities, there are usually municipal guidelines that protect against the acquisition of the minerals through the surface estate (the land you’re buying). These are also exceptions to the title policy. In this case, the exceptions are positive because they provide protection. Other examples include the rights of gliders to fly overhead from the Air Force Academy, historic liquor laws in downtown Colorado Springs (the city founder was a prohibitionist) and no-build areas.
The lender does not cover exceptions, hence the name. They can, but there are added fees associated with that coverage that the buyer must pay. So, for certain items (liquor reverters, mining claims, homeowner associations, etc.), the title company will charge an endorsement. This fee is a one-time fee and indicates to your lender and the lender’s investors that many of these items will not have actual impact to the property that is the lender’s collateral should you foreclose on the property down the line. Without paying these fees, you will not likely obtain market rates on your loan. Most transactions pay between $150 and $500 in endorsements, and a lender that works exclusively in El Paso or Teller County should indicate such an estimate in their Good Faith Estimate.
When the sale or loan of the subject property is final, and the title company has recorded the necessary documents in order to close, they then issue a policy of title insurance to the new lender and/or buyer showing clear title of subject property. Some title companies issue this commitment at closing, others mail the policy within 30 days of the close of sale.