Getting Familiar with the Purchase Contract
It’s important for both buyers and sellers to become familiar with the “Contract to Buy and Sell Real Estate (Residential)”. This document is also referred to as a 'purchase contract'. You can access the Colorado Real Estate Commission approved purchase contract for your review here.
Note- this document isn’t a ‘contract’ until fully executed by both parties (also known as MEC or Mutual Execution of Contract) so you’ll commonly hear it referenced as an “offer” in the interim.
This is the state-mandated purchase contract that has been approved by the Colorado Real Estate Commission. All Colorado real estate licensees are required to use this form for residential sales with the exception being homes that are new construction.
These purchase contracts can vary significantly between states. In many states, real estate attorneys are required to be involved in the real estate transaction. Colorado does not require the use of real estate attorneys within a transaction or at the closing.
Although the purchase contract is now 18 pages long, we believe the state has done a good job and covered the vast majority of details surrounding a transaction so as to prevent disputes.
The purchase contract is very much in favor of the buyer. This is because the contract is loaded with dates and deadlines (AKA contingencies) which benefit the buyer and once under contract, the seller has only a few ways to terminate. Of course, there are certain exceptions and all exceptions are outlined within the Contract. This is one of the reasons why it is critical for you to read this document in its entirety.
You’ll note that Section 3 (found on pages 2 and 3) is loaded with ‘dates and deadlines’. These dates and deadlines are negotiable and not all will be used (some may not be applicable while others may be removed to strengthen your offer). Each one references a particular section of the contract (where you can learn all of the details surrounding that contingency) and hence, makes up the bulk of the contract.
Typically, the fewer contingencies that are within the contract and the shorter the dates and deadlines, the stronger your offer will be. Buyers want their earnest money protected as long as possible and therefore want the dates and deadlines extended out as far as possible while the sellers want just the opposite. They want to know that you are truly committed to buying their home so that they can prepare to move on to the next chapter of their lives.
A Few of the Main Contingencies
Inspection contingency, § 10.3
Once the buyers and sellers have a fully executed contract, the buyers are immediately within the inspection/due diligence period in which they’ll want to learn all there is to know about the property. The inspection contingency is the most common contingency used to terminate the purchase contract. There are several reasons for this. Essentially, if the property is “unsatisfactory, in Buyer’s sole subjective discretion” the buyer may terminate the contract. Based on this language, the buyer can back out for just about any reason. Some buyers may get ‘buyer’s remorse’ shortly after going under contract and feel that they are getting in over their heads while others very much wanted the property but couldn’t come to a satisfactory resolution with the seller’s for the items that they discovered during this period of due-diligence. Other buyers may have found perceived or evident problems with a property (such as structural issues) that will cause them to want to terminate the contract regardless of the seller’s willingness to work with them.
Appraisal contingency, §6.2
Buyers obtaining financing will likely utilize the appraisal contingency. This contingency gives the buyer the ability to terminate or renegotiate the terms of the contract if the appraised value is less than the contracted purchase price. In a strong sellers’ market, there are often multiple buyers competing for the same property and naturally, the purchase price could rise to a point that exceeds what the appraiser deems as the ‘fair market value’ based on recent comparable sales. In order for a buyer to obtain financing, the lender will require that an appraisal is completed and the lender will not lend over the fair market value. If the seller is unwilling to lower the purchase price down to the appraised value, the buyer can terminate the contract or bring additional cash (on the day of closing) to make up the difference between the contract price and the appraised value. It is unfortunate when buyers are in a situation like this but it is not uncommon when there is a bidding war for the property. This is one of the areas in which an agent with strong negotiating skills can make a significant financial difference in the outcome of the transaction.
In a strong sellers market, some buyers may elect to leave the appraisal contingency out altogether to demonstrate to the seller that they’ll bring the additional cash if there are any issues with the appraisal. As for cash buyers- they don’t have anyone requiring them to obtain an appraisal so they’ll often leave the appraisal contingency out in an effort to strengthen their offer.
Loan contingency, § 5.2
For buyers obtaining financing, the last contingency before their money goes ‘hard’ (the point in which the buyer no longer has contingencies and their earnest money deposit will either be applied to the purchase price when they close on the property or will go to the seller if they don’t close on the property for some reason) is typically the ‘Loan Objection Deadline’. This contingency may go out as far as a few days prior to closing on the property. It essentially states that the Buyer can terminate the contract if the new loan being obtained is not satisfactory to the buyer based on the “Buyer’s sole subjective discretion”. Cash buyers will not have this contingency in their offers which is one of the reasons why sellers prefer cash buyers over buyers obtaining financing.
Although there are many other items that can and should be discussed, the key takeaway is to read and become familiar with this contract early on in the process of buying or selling. We're more than happy to answer any questions that you may have so feel free to contact us to get your questions answered. We'll also be happy to share far more knowledge to help ensure you're a well-informed homebuyer.