Contract to Buy and Sell, part 3: inspections, due diligence, appraisal, loan, disclosures

Bottom line: the signed contract is not the finish line. It starts a set of clocks. Each clock is a date in the contract's Dates and Deadlines table. Beat the date and you keep your options. Miss it and the option is usually gone. A broker's main job in this phase is to watch the clocks.

This lesson covers the "conditions" part of the Colorado Contract to Buy and Sell. A contingency (also called a condition) is a promise in the contract that lets the buyer back out, or renegotiate, if something checks out badly. The earnest money is the buyer's good-faith deposit, held by a broker or a title company. If the buyer ends the contract correctly and on time, the earnest money comes back.

1. Seller's Property Disclosure

The seller fills out a written form saying what the seller knows about the home: roof leaks, past flooding, additions done without a permit, and so on. The contract has a deadline for the seller to hand it over. It is a statement of what the seller knows. It is not a warranty and does not replace an inspection. A seller who knowingly hides a problem can be sued for misrepresentation, whatever the form says. Your job as broker is to remind the seller that honest answers are the safe answers.

2. Lead-based paint

For homes built before 1978, federal law requires the seller to give the buyer a pamphlet on lead hazards, disclose any known lead paint, hand over any reports, and give the buyer a chance to test (the federal default is a 10-day window unless the parties agree to something else) (42 U.S.C. 4852d; 40 C.F.R. Part 745 Subpart F). Buyer and seller sign a disclosure form, and the brokers must make sure it happened. A buyer who finds lead can end the deal inside that window. This is federal law, so the Colorado Commission form just plugs it in.

3. Inspection and the objection process

The contract has an inspection period, ending on the Inspection Objection Deadline. Inside it the buyer may hire inspectors for the building, sewer line, roof, radon, and anything else. By the deadline the buyer must pick one path, in writing:

• Accept the property as is (say nothing and the condition is treated as accepted).
• Object and ask for repairs or a credit. This opens a negotiation window that ends on the Inspection Resolution Deadline.
• Terminate the contract with a written notice before the objection deadline. Earnest money goes back to the buyer.

If the objection is made and the parties do not settle in writing by the resolution deadline, the standard form lets the contract end unless the buyer withdraws the objection in time. Read the exact current form for the mechanics. Lesson c2-11 covers the Inspection Objection and Inspection Resolution forms themselves.

4. Due diligence beyond the house

Due diligence means the buyer's own homework on the property before being locked in. Typical items: leases (if tenants live there, the buyer takes the property subject to them, so read the lease, the rent and the deposit), insurance (can the buyer even get a policy, and at what price? a claims history can sink it), zoning (what can be built or run there), and environmental matters (old fuel tanks, mine hazards, floodplain, radon). The buyer also checks the title commitment and the survey and, if there is a homeowners association, its papers. Brokers must not give legal advice on title exceptions. They must tell the client to read them and recommend a lawyer (Rule 6.14.F).

5. Statutory disclosures in every contract

Colorado puts some required wording in the contract itself. Examples: special taxing districts (C.R.S. 38-35.7-101), the common interest community notice (38-35.7-102), the source of potable water (38-35.7-104), and elevated radon (38-35.7-112). If the seller fails to give the special district or common interest notice, the buyer has a claim against the seller for damages plus court costs. Lesson c2-12 digs into these.

6. The appraisal condition

An appraisal is a licensed appraiser's written opinion of what the home is worth. The lender orders it, because the lender will only lend against what the home is truly worth. The contract has an Appraisal Objection Deadline and an Appraisal Resolution Deadline. If the appraisal comes in under the price (a "low appraisal"), the buyer can usually terminate, negotiate, or accept. The buyer may only use the appraisal right if the contract's appraisal condition applies. If the buyer waived it, a low appraisal is the buyer's problem.

7. The loan condition

Most buyers need a mortgage. The contract lists a Loan Termination Deadline. The buyer has until that date to say the loan will not work and walk away with the earnest money. After that date, if the loan falls through, the buyer is generally exposed to the seller's default remedies (see c2-10). Buyers must give the lender what it needs fast: pay stubs, bank statements, and the signed documents. The big rule for brokers is to never promise a buyer that the loan "will be fine".

Example with real numbers

A buyer in Boulder County signs a $500,000 contract with a 20% down payment.

1. Planned loan: 80% of $500,000 = $400,000. Planned down payment: $100,000.
2. The appraisal comes in at $480,000. The lender lends 80% of the lower of price or value: 80% x $480,000 = $384,000.
3. The loan is now $16,000 smaller ($400,000 minus $384,000). That is the appraisal gap.

The buyer's choices:

• Pay the gap in cash. Down payment becomes $116,000 ($500,000 minus $384,000). The buyer pays $16,000 more to buy a house the bank thinks is worth less.
• Ask the seller to drop the price to $480,000. Loan $384,000, down payment $96,000. Seller loses $20,000.
• Split it. Price $490,000. Loan 80% x $480,000 = $384,000 (value still $480,000). Down payment $106,000. Each side gives up some.
• Challenge the appraisal with better comparable sales (a request for reconsideration of value).
• Terminate before the Appraisal Objection Deadline and get the $10,000 (say) earnest money back.
• Do nothing past the deadline and lose the right to terminate over it.

Whichever route, put it in writing (an amendment, see c2-11) and before the deadline.

Broker duties during this phase

Keep a deadline calendar. Deliver copies of every signed document to your clients when you prepare them (Rule 6.14.A.2). If you prepare contract changes, list all financial terms accurately (Rule 6.14.A.1). Give each party a closing statement at the end (C.R.S. 12-10-217(1)(j)). Do not give legal or title advice. Recommend a lawyer.