As a trial lawyer for 25 years, I witnessed the fallout from many contracts gone bad…
Sometimes it was the result of poor drafting. Things like ambiguous contract provisions, poorly worded clauses, and even unintelligible provisions that no one understood often found their way into contractual agreements.
Sometimes it was due to a misunderstanding, like when one of the parties were not informed and didn’t understand what they were signing. And sometimes—more often than you would care to imagine—it was the result of outright fraud and deceit, where one party purposefully acted in bad faith to scam the other party.
Fortunately for folks living in Colorado, the legislature and the Colorado Division of Real Estate have enacted various laws, rules, and regulations over the years to protect home sellers and home buyers (and real estate brokers and agents) by creating consistency and certainty in the transaction process. For example, the Real Estate Division has created numerous standard contracts and related documents that must be used by licensed real estate brokers and agents when buying and selling real estate in Colorado.
These form contracts do not preclude home buyers or home sellers from buying and selling real estate without a licensed broker or licensed real estate agent (identified as an Associate Level Real Estate Broker/Broker Associate in Colorado) nor do they prevent them from creating their own written contracts or adding their own provisions to the forms (when a Broker Associate is not involved). Using the standard forms can help prevent the kinds of contractual problems (ambiguity, misunderstandings, fraud) that lead to costly and time-consuming lawsuits and make it easier for consumers to understand the process—ideally with the help of a REALTOR®. Yes, even with the form Contract available, I believe it would be a mistake to go through the complex process of buying and selling real estate without professional help from a REALTOR®.
Thus, notwithstanding the laws and regulations and forms that are intended to protect consumers, there are still many pitfalls to real estate transactions that REALTORS® like me can help consumers avoid.
Below are 10 legal issues you’ll likely face when buying or selling a home in Colorado.
BUT FIRST… DID YOU KNOW?
A real estate agent cannot dispense legal advice or provide legal opinions unless they are also an active, licensed lawyer. Because of the legal implications, consumers are directed in the form Contracts to seek advice and counsel from accountants and lawyers. In fact, it is the duty of a REALTOR® to direct their clients to legal and tax counsel to obtain legal or tax opinions. You should always consult with a competent real estate attorney to answer any legal questions you may have. CONTACT ME if you need a referral to a real estate attorney.
1. Buying And Selling Real Estate Involves Binding Contracts
Sometimes buyers and sellers of real estate can let emotions take over rational thinking, which usually creates problems in the process. Both sides typically want the “best deal,” and when something happens during the process that negatively impacts the buyer’s or seller’s expectations, the party who thinks the deal is no longer as good as it was (or the expectation that a so-so deal was going to get better isn’t met), may think about changing the deal or just walking away.
But here’s the problem: the buyer has made an offer, which was accepted by the seller, and the buyer has given money (earnest money) to secure deal. That has likely created a contract, and contracts, as everyone should understand, are serious matters because they can legally bind you to do certain things. And if those certain things are not done by one party, the other party can often seek remedies, such as forcing the sale or obtaining damages.
Yes, there are provisions, called contingencies, in the Contract to Buy and Sell Real Estate (Residential) that may allow one or both parties to cancel the contract. But these contingencies can have their own legal implications and requirements. A real estate lawyer should be consulted if there are questions concerning the legal implications of cancelling a Contract to Buy and Sell Real Estate.
From the REALTOR® perspective, the bottom line is this: while home buying and selling may be an exciting and sometimes emotional process, all involved should remember significant legal rights and responsibilities and consequences arise from various real estate contracts, whether it’s a listing agreement (Exclusive Right-To-Sell or Exclusive Right-To-Buy), the Contract to Buy and Sell Real Estate (Residential), or any of the other agreements used when buying and selling real estate.
A good REALTOR® should help manage the client’s expectations, make sure the client understands the contracts and obligations, and if the client has legal questions, the REALTOR® should make sure the client is directed to a competent real estate lawyer to provide legal guidance. The more informed buyers and sellers are, the less likely conflicts will develop.
2. The Listing Agreement – Contract Between Agent And Client
Sellers of residential real estate will typically enter into a listing agreement with a real estate brokerage (the standard form contract is called the Exclusive Right-To-Sell), which is an agreement between the homeowner seller and the brokerage firm that allows the agent/Broker Associate to help sell the property for a certain period of time. It’s an agreement that typically obligates both the agent and the seller to do certain things with the goal of finding a ready, willing, and able buyer for the property being sold. This agreement sets forth duties of the Brokerage/Broker Associate and sets forth the compensation to be paid to the Brokerage, the circumstances under which the compensation is earned, and the amount to be paid to buyer’s agents.
Savvy buyers will also typically retain the services of a buyer’s agent to help them find the right home at the right price, prepare and negotiate the contact, and guide them through the process. Like the Exclusive Right-To-Sell, the buyer’s agency agreement, called the Exclusive Right-To-Buy, obligates both the buyer and the agent to do certain things, with the goal of finding a property with a price and terms acceptable to the buyer. The compensation to be paid to the brokerage/buyer’s agent is set forth in the Exclusive Right-To-Buy.
Communication Is Key
Conflicts can and do arise with these real estate agency agreements and when they do, the best course of action is for the parties to meet and talk through whatever issue is causing the conflict. Conflicts will often arise when expectations have not been managed by the agent/Broker Associate at the very beginning of the relationship, or there has been a miscommunication (or lack of communication).
Thus, to help avoid conflicts, a good real estate agent will make sure their seller or buyer client understands exactly what will be done, when it will be done, why it will be done, and how it will be done. All questions should be answered before the Exclusive Right-To-Sell/Exclusive Right-To-Buy agreement is signed and the client should have no doubt what their obligations are and what the agent’s obligations are.
Importantly, in both the Exclusive Right-To-Sell and Exclusive Right-To-Buy agreements, one of the duties of the agent/Broker Associate is to counsel the seller or buyer “as to any material benefits or risks of a transaction that are actually known by Broker.” And when the issues relate to legal or tax obligations or rights, the agent/Broker Associate must advise the seller or buyer to obtain legal or tax counsel.
The bottom line: good agents (and clients) will make sure they communicate clearly, effectively, and often.
But on that rare occasion when conflicts, issues, or problems escalate, causing the relationship between the agent and the client to suffer, what then? Can a seller or buyer terminate the contract with their agent in order to find a different agent?
When Conflicts Arise
Depending on the circumstances, the client or the agent may be able to get out of the contract. The Exclusive Right-To-Sell and Exclusive Right-To-Buy agreements set forth the “Rights of Parties to Cancel.” Terminating a listing/buyer’s contract before it expires, however, can have legal consequences, (for example, there may be “procuring cause” issues that would require a commission payment to the terminated agent). Consulting with a lawyer may be helpful and necessary if a buyer or seller contemplates termination of a listing contract with their agent. When conflicts arise, the Exclusive Right-To-Sell and Exclusive Right-To-Buy agreements set forth procedures for mediation and the payment of attorney fees if the conflicts escalate to arbitration or litigation.
Looking for a REALTOR® in Denver? CONTACT ME. I can help you buy or sell real estate with confidence.
3. The Contract To Buy And Sell Real Estate – Contract Between Buyer And Seller
The Contract to Buy and Sell Real Estate (Residential) is the Colorado form contract between the seller of the property and the buyer. (Note that neither the buyer’s agent or seller’s agent are a party to the buy and sell contract. As discussed above, the obligations of the agents/Broker Associates are set out in the Exclusive Right-To-Sell and Exclusive Right-To-Buy agreements agreements).
The form Contract to Buy and Sell Real Estate (Residential) is a long, 18 page document. Why is the Contract to Buy and Sell Real Estate so long? It’s because so many legal issues are involved when buying and selling real estate.
The provisions in the Contract to Buy and Sell Real Estate (Residential) generally do the following:
- they provide a vast number of instructions, disclosures, and paragraphs dedicated to setting forth important and necessary information about the property being sold and the transaction itself. For example, the contract contains the identity of the parties to the contract, the property description, property condition information, inclusions and exclusions, payment terms, financing information, title insurance information, survey information, disclosures relating to oil and gas interests, due diligence information, closing information and instructions, fees and costs, tax information, insurance and risk of loss information, recommendation of legal and tax counsel, time of the essence information, notice information, choice of law information, etc.)
- they set forth the rights, duties, and obligations of the seller;
- they set forth the rights, duties, and obligations of the buyer;
- they set forth important deadlines that each party must abide by;
- they set forth the circumstances under which a party can terminate the contact; and
- they set forth the consequences when the buyer or seller fails to fulfill their duties and obligations.
Your REALTOR® should understand these provisions, should be able to explain the purpose of each provision, and direct the buyer or seller to competent legal or tax counsel to answer any questions about the legal or tax implications of any provision.
Negotiating The “Best Deal”
One of the most important things a REALTOR® can help a buyer or seller with is negotiating the “best deal” in the Contract to Buy and Sell Real Estate. What the “best deal” is, of course, will depend on what the buyer or seller wants and is almost entirely subjective.
For a seller, it may mean getting the highest price possible, even if it takes more time to sell. Or it may mean selling as fast as possible. Or it may mean achieving a reasonable balance between a high price and time spent on the market. A buyer’s “best deal” may mean finding that perfect house that checks all the boxes, even if it requires spending more. Or it may mean finding a distressed fixer-upper at a reasonable price for a fix-and-flip opportunity.
While the real estate agent/Broker Associate can help find and negotiate the deal and make recommendations, only the buyer or seller will be able to decide if they want to agree to it, and whether they are happy with it.
Note that the deals that can be made will also depend on the market itself. In a hot seller’s market, when inventory dwindles, multiple offers are likely to prevent a buyer from getting a “deal” on price. In fact, buyers may have difficulty reaching any deal, and may lose out to other buyers with stronger offers. In that situation, buyers need to understand how to structure an offer that will stand out among the competing offers. Even in a market when multiple offer situations are not as common, a strong offer on a house the buyer loves will help ensure acceptance when a seller has time to wait. A REALTOR® can help a buyer prepare the best offer in any market.
When selling a home, sellers need to understand that their home must be ready to sell. Perhaps one of the most important things for sellers to remember is that overpricing a home will often kill the potential for the seller to obtain their “best deal.” For a variety of reasons, an overpriced home will most likely sit on the market longer, and when it does sell, it will likely sell for less than it would have had it been priced correctly in the first place. This can be a difficult fact for a seller to understand or accept when they visit online companies that show the potential “estimated value” of their home (which may be tens of thousands of dollars off from the true market value), or they have an emotional attachment to their home that makes then believe their home is worth more than it actually is. Engaging a REALTOR® is an important step to making sure the price is right.
To Err Is Human
Humans make mistakes. But some mistakes have greater consequences than others. Mistakes made in a Contract to Buy and Sell Real Estate can potentially have serious legal consequences.
Accordingly, it is important for your REALTOR® to not only understand the Contract to Buy and Sell Real Estate, but to also be detail-oriented in order to avoid mistakes. Dates and deadlines should all be correct, appropriate boxes should be checked, and all terms should be clear and error-free.
While mistakes made by one party in the Contract to Buy and Sell can often be fixed by an amendment, the other party may not always be so accommodating and may play hardball. Mistakes can cost money and time and may create legal problems. Mistakes may kill the deal. It is best to get the Contract to Buy and Sell right and mistake-free the first time.
4. The Consequences Of Breaking The Contract
Once the Contract is formed, it usually creates legally binding rights and obligations for both the seller and the buyer. What if the seller later decides he or she does not want to sell? Or what if the buyer finds another, better property to buy? Can the seller or buyer get out of the Contract?
In Colorado, the Contract to Buy and Sell Real Estate (Residential) has several opportunities for a buyer to walk away from the contract. Points in the transaction where buyers can get out of the contract and not lose their earnest money (if the proper procedures are followed) include the appraisal objection deadline, inspection objection deadline, the title objection deadline, and the loan/financing objection deadline. There are several other circumstances and deadlines listed in the Contract to Buy and Sell Real Estate (Residential) where a buyer can terminate the Contract. Your REALTOR® will be able to point out and explain these important provisions and the requirements of the Contract (but cannot provide legal advice concerning them).
If a buyer’s reasons for terminating do not fall within these provisions (or the procedures are not properly followed), the buyer may not be able to terminate without consequence. That consequence can be limited to the loss of earnest money paid, although the Contract can provide for specific performance, meaning the seller can treat the contract as being in full force and effect and can force the sale, seek damages, or both. If the issue arises, a buyer should obtain legal counsel to explain the legal ramifications of breaching the Contract and the legal rights of the parties.
The seller, on the other hand, has more limited opportunities to get out of the Contract without consequence. A seller who fails to perform his or her obligations under the Contract may be forced to sell the property and/or pay damages to the buyer. If the issue arises, a seller should also obtain legal counsel to explain the legal ramifications of breaching the contract and the rights of the parties.
5. Clear Title: Encumbrances, Easements, And Liens, Oh My!
Most real estate transactions will involve a title company, whose job it is to thoroughly examine the title of the property being sold, determine if there are any ownership/title issues, report them to the buyer and seller, and issue a title insurance policy to protect the parties in case there are problems in the future. The title insurance policy is intended to protect the owner and/or lender against claims and lawsuits that may result from disputes over the property’s title.
When problems are found with the title, various legal procedures are necessary to clear the title; legal counsel may need to be involved.
Buyers and sellers should also be aware of any encumbrances (like utility easements, use restrictions, or liens) that may affect the property, and understand the rights and obligations surrounding them. The sudden realization that others may have a right to use a part of your property (or property adjacent to yours) can make for a bad day, as a family in Denver just recently experienced when they watched Verizon install a 50’ Cell pole in the easement next to their house.
It is important to remember is that title issues (where someone else may claim an ownership right in some or all of the property), and liens (e.g., judgment liens or tax liens) can impact the ability to sell your property, and generally must be cleared up before closing.
6. Caveat Emptor And Disclosure Of Adverse Material Facts
The traditional rule in buying and selling real estate is caveat emptor, which means, “let the buyer beware.” Buyers generally must rely on their own inspections, research, and knowledge to identify problems, or potential problems, with a piece of property. Indeed, as the Contract to Buy and Sell explicitly states: “Buyer acknowledges that Seller is conveying the Property to Buyer in an ‘As Is’ condition, ‘Where Is’ and ‘With All Faults.’” Caveat emptor is the starting point in the real estate transaction process, and REALTORS® should make sure their buyer clients understand that they need to “beware of” everything relating to the real estate.
With this in mind, buyers and sellers should also understand that the harshness of caveat emptor has been softened somewhat by certain seller and agent disclosure obligations as well as the inclusion of various contract provisions that allow buyers to terminate a contract if they find objectionable issues with title, physical condition, value, etc.
No longer can a seller remain silent and hide property defects they know about. The Colorado Contract to Buy and Sell Real Estate (Residential) form itself obligates the seller to deliver a Seller’s Property Disclosure form, which records the knowledge of the seller about any known material problems or adverse issues with the property, and the Contract otherwise obligates the seller to disclose to the buyer any adverse material facts actually known by the seller.
The Real Estate Commission’s approved Seller’s Property Disclosure form is a tool to protect consumers, both sellers and buyers. It protects buyers from being duped by sellers who know of material hidden defects in the property. At the same time, it protects honest sellers who disclose problems from being later sued by disgruntled buyers; indeed, a buyer can’t come after the seller when the buyer purchases the property knowing of the defect.
Buyers and sellers should also be aware Colorado real estate license laws impose an independent obligation on real estate agents/Broker Associates to disclose adverse material facts known to them. So even if a seller does not want to disclose a known material defect, if the agent knows that defect exists, the agent is obligated to disclose it.
The consequences of failing to disclose a known defect can be severe. When I was a lawyer, I represented a client buyer whose home he purchased was later damaged by frozen pipes, causing severe water damage and diminution of value. The evidence showed the seller knew the freezing pipes were a problem but failed to disclose it. In the end, the seller agreed to pay my client a significant sum to resolve the claim.
To help avoid the potentially severe consequences of failing to disclose, a seller should heed the words of his or her REALTOR® when they say, “if you have to ask whether an issue should be disclosed, then it probably should be disclosed.”
7. The Inspection Process – Managing Expectations
In Colorado, a buyer can inspect the property being sold and if the buyer sees something on the inspection report they do not like the buyer can generally terminate per the terms of the Contract to Buy and Sell Real Estate.
If the buyer really wants the property, the buyer can ask the seller to make repairs, ask the seller to give monetary concessions, or obtain certifications for items like the roof or HVAC equipment. If the parties reach agreement, the Contract continues. If the parties do not agree, the buyer has a choice: he or she can terminate the Contract and get their earnest money back (if the proper procedures are followed), or if the buyer still really wants to property, they can agree to move forward to closing despite the defects.
And this brings up a fact that can frustrate buyers: no matter what comes up on the inspection report, the seller does not have to make any repairs or give any concessions to the buyer. The seller may simply decide to sell the property, as noted above, “As Is.”
So, in a seller’s market, where inventory is low and there may be multiple offers on a property above asking price, a seller is unlikely to offer to fix anything. The seller typically doesn’t have to when he or she has a line of people waiting to buy the property. On the other hand, in a softer market, where buyers have more options, a seller probably will offer concessions and repairs to keep the deal together. The seller may even want to obtain a pre-listing inspection—and fix issues even before it goes on the market.
The key to the inspection process is to make sure the critical deadlines are met. Missing an inspection related deadline (inspection, resolution, objection) can result in the buyer having to pay thousands of dollars in repairs later on that they otherwise may not have had to pay had the issues been timely addressed during the transaction.
The inspection process can be a source of confusion, heartburn, and sometimes anger on both sides. It is my belief that these feelings are typically the result of the seller’s agent or buyer’s agent failing to educate, or failing to manage the expectations of, their clients.
Both sellers and buyers should know that an inspector will find issues (material or otherwise) even in the most meticulously maintained home. Both buyers and sellers should know that many issues on an inspection report are not material and not worth worrying about. Indeed, a loose doorknob should never be an issue. Are there circumstances where a buyer will demand delivery of a “perfect” home? Possibly. But for most real estate transactions, both buyers and sellers should know that after the inspection is done and a report is issued, they should focus their efforts on resolving the most important items—health and safety issues (e.g., old smoke detectors, radon) and high-dollar items (e.g., furnace, roof, sewer).
Here’s the bottom line: the buyer should remember that the seller is not legally required to fix anything; at the same time the seller should remember that the buyer has the opportunity to terminate the Contract if they are not happy with any inspection items—forcing the seller to put the home back on the market. The negotiations should take these factors into consideration.
In the end, it is my belief that the buyer and seller should largely treat the residential real estate transaction as a mutually beneficial, win-win event, rather than an adversarial, conflicting process. To be sure, there is room for strategic (even aggressive) negotiations on each side to try and obtain the “best deal,” and indeed, a REALTOR® is obligated to “promote the interests of their client” and will do so to achieve the client’s goals. But even though this “obligation to the client is primary,” it does not relieve REALTORS® of their obligation to “treat all parties honestly.” (Article 1, Code of Ethics and Standards of Practice of the National Association of REALTORS®, emphasis added). Moreover, REALTORS® are required to cooperate with other brokers when it is in the client’s best interest to do so. (Article 3, Code of Ethics and Standards of Practice of the National Association of REALTORS®).
Thus, because the ultimate goal for both parties to the Contract is the same—to reach the closing table and transfer ownership of the property—viewing the process as a mutually beneficial transaction to facilitate that goal and cooperating to the greatest extent allowed while still fully representing a client’s interests, can go a long way to avoiding problems during inspection, or any other time during the transaction.
8. Time Is Of The Essence – Meeting Deadlines Is Critical
Buyers and sellers must understand the principle, “time is of the essence.” This means that any actions required in the contract must be done timely, and usually by a set deadline. Deadlines are critical in real estate transactions and those deadlines must be followed precisely. If they are not, the party failing to meet the deadline can be in breach of the contract, which can at the very least cause headaches for both parties and may even result in far more serious consequences. The buyer can lose their earnest money. The seller may have to pay damages. Time is lost. Expensive lawyers may need to be consulted.
The best thing for both sides to remember is that timely action is essential, and each party and their agent should give the timing provisions of the Contract the attention and seriousness they deserve.
9. Multiple Owners, Multiple Issues
Multiple owner problems involving the sale of residential real estate may arise from a variety of scenarios, often through divorce or through inheritance. When more than one person owns a piece of property and the property is being sold, the owners (many times a group of family members) may be completely on the same page, or they may have completely different ideas about price, timing, updates, or repairs. Multiple owners may not agree on whether to accept a certain offer or contract term and issues concerning the distribution of proceeds may crop up. Multiple owners may dispute ownership status and may even dispute whether to sell the property in the first place.
These transactions can be messy, especially when multiple family members are involved. A REALTOR® can help to educate owners about the buying and selling process, but many times, multiple owner situations will require the involvement of competent legal counsel when agreements cannot be reached and conflicts cannot be resolved.
10. And They All Lived Happily Ever After… What Happens After Closing?
The house has closed! The buyer now has a new home! The seller has made a significant amount of money on the sale. Everyone is happy! Hurray!
But… what happens when a year from now the air conditioning breaks and needs to be replaced or the sewer backs up or the roof begins to leak? How happy will the buyer be then? How happy will the seller be when they get sued for failing to disclose problems?
The Seller’s Property Disclosure (discussed above) is intended not only to inform the buyer of issues before closing, but also to alleviate any unpleasant surprises after closing. When a buyer knows the condition of the house he or she is buying, when they buyer knows the roof may leak, when the buyer knows the air conditioning is old and may need repair, when the buyer knows the sewer has moved in the swelling soils, the buyer has no basis for being unhappy and no basis for going back to the seller when there are problems. The buyer knowingly bought those problems. Caveat emptor!
But if a seller has failed to disclose a problem about which he actually knew (recall the frozen pipe scenario above), the buyer may have recourse against the seller, and the seller should not be surprised to find himself in court. To avoid these potential problems, a seller would be wise to complete the Seller’s Property Disclosure form fully and accurately.
For added protection for certain home systems and appliances, buyers (and sellers) should also consider obtaining a home warranty plan, which can provide coverage for everything from garbage disposals to air conditioners. Policies are not all the same and coverages vary, so shopping around may be a good idea. Your REALTOR® should be able to explain the benefits of purchasing a home warranty and have recommendations.
If you are going to buy and sell real estate, you should be prepared for the legal issues that are part and parcel to the process. While a REALTOR® cannot dispense legal advice (unless they are also an active, licensed lawyer), your REALTOR® should be well aware of the legal issues inherent in the transactions and be prepared to refer you to a competent real estate attorney to provide advice and opinions when needed.
A Final Note
I am a full-time Colorado licensed RELATOR® with The O’Brien Team at RE/MAX Alliance. While I am a Colorado and Wyoming licensed attorney, I have placed my licenses on inactive status, since I am no longer actively practicing law. Nothing in this blog post is intended to provide legal advice or opinion, nor should anything herein be construed as legal advice or legal opinion. This information is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship. If you have any legal questions about real estate, you should always consult with a competent real estate attorney. Need a referral? Contact me and I’ll point you in the right direction.
If you are looking to sell your home, buy a home, or just want more information, give me a call at (720) 926-5230 or email me using the form below. I look forward to connecting with you!