Buying a House in Colorado

Buying a house is one of the most important legal transactions you'll ever undertake. It's important to know your legal rights and understand the process.

Working With a Real Estate Agent

In Colorado, real estate agents have what's called a "fiduciary duty" in instances in which they are legally representing a buyer in a sales transaction. In Colorado, this means that the agents are held by law to owe specific duties to the person who they are representing, in this case, the buyer. However, a seller's agent must disclose to potential buyers all adverse material facts actually known by the seller's agent about the property. In addition to duties or obligations that are included in a contract for the real estate agent to represent you, often called a buyer's agency agreement, a fiduciary's duties include:

• Loyalty
• Obedience
• Disclosure
• Confidentiality
• Reasonable care and diligence
• Accounting

You may want to hire a "buyer's agent," which is someone that will act on your behalf. The buyer's agent must disclose to potential sellers all adverse material (important) facts actually known by the buyer's agent including the buyer's financial ability to perform the terms of the transaction and if a residential property, whether the buyer intends to occupy the property. Whether the buyer will occupy could be an issue if you are buying a condominium that doesn't allow the units to be rented, or if a lender requires the buyer to live in the home. The sales commission is then split between the seller's and buyer's agent.

When selling a house, disclosure of all important facts actually known to the seller is critical, even though it may impact on the ability to complete the sales transaction or on the ultimate sales price of the house. Colorado's Real Estate Commissions provides standardized property disclosure forms.

A seller should disclose the following potential house defects:

• Plumbing and sewage problems
• Water leakage of any type, including in basements
• Termites or other insect infestations
• Roof defects
• Heating or air conditioning system and electrical or other mechanical system problems
• Property drainage problems
• Foundation instabilities or cracks
• Problems with title to the property
• Environmental conditions such as hazardous materials located on the property
• Whether a methamphetamine lab was located on the property, and that the remediation cleanup has not occurred
• Whether property is part of a homeowners' association
• Designate the water source for the property
• Lead paint (required under the federal Residential Lead-Based Paint Hazard Reduction Act of 1992 for homes built prior to 1978)

Purchase Agreements

When you find a house you'd like to buy, you'll put together and sign a purchase and sale agreement, often called a "sales contract" in Colorado, which contains all of the terms of the sale, including the following:

• The names and addresses of the sellers and purchasers
• The purchase price and amount of down payment
• Arrangements for financing
• The legal description of the property
• A provision that title to the property shall be good and marketable of record, subject to reasonable easements
• The condition of the property at the time of sale
• Date of settlement and possession
• Statement of the settlement costs
• Provision as to who bears the risk of loss if the property should be damaged prior to settlement
• Liens on the property

An important thing to remember is that you should consult your Colorado real estate attorney before you sign the contract. The real estate transactions involved in purchasing a home give rise to a number of legal questions that a lawyer with a real estate background and experience is best equipped to answer.

Inspection

It's always a good idea to hire an independent professional home inspection service before you buy a house. A home inspection is a visual examination of some combination of the structural, mechanical, electrical and plumbing systems that is designed to identify material defects in those systems and components. You can make your offer contingent on inspection.

Every inspection should include an evaluation of at least the following:

• Structure
• Roof
• Exterior
• Heating or air conditioning, electrical or other mechanical system problems
• Plumbing
• Electrical system
• Environmental conditions such as hazardous materials located on the property
• Whether a methamphetamine lab was located on the property, and that remediation cleanup has not occurred
• Whether the property is part of a homeowners' association
• Designate the water source for the property
• Interior

Legal Title Issues

When a home is purchased, title insurance is also purchased. Based upon a search of public records, a title search brings attention to any known property title problems before the closing takes place. It also insures against loss due to certain title defects that didn't turn up during the title search. Your real estate lawyer or title company will investigate the legal title of the property you want to buy, and may find issues you'll need to understand.

In Colorado, for example, an implied easement exists where a person grants lands to which there is no accessible right-of-way except over her or his land or retains land that is inaccessible except over the land which the person conveys. In such instances a right-of-way is presumed to have been granted or reserved. Such an implied grant or easement in lands or estates exists where there is no other reasonable and practicable way of accessing the property, and it is reasonably necessary for the beneficial use or enjoyment of the part granted or reserved.

The property you're interested in may also be subject to a "lien," which is a charge on the property to satisfy a debt or other obligation owed by the current owner of the property. A lien encumbers property for as long as it exists and has been recorded in the public records.

In Colorado, liens on a piece of property may include:

• Mortgages or trust deed liens
• Construction or mechanics' liens
• Tax liens
• Municipal liens
• Judgment liens

Closing Costs

In Colorado, you can expect to pay for the following charges - called "closing costs"- at the time you purchase your home:

• Down payment
• Pre-paid items, which are collections in advance for loan interest, homeowners insurance and property taxes
• Credit report
• Property appraisal fee
• Origination fee
• Discount points
• Improvement location survey
• Recording fees
• State documentary fees
• Real estate closing fees (normally split 50/50 between buyer and seller)

The seller typically pays for the following closing costs:

• Lender's title insurance
• Real estate closing fees (normally split 50/50 between buyer and seller)

RESPA

The US Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) administers several regulatory programs to ensure equity and efficiency in the sale of housing. One of these programs, under the Real Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans and mortgage companies, not just FHA-insured mortgages.

RESPA protects consumers by requiring a series of disclosures that prevent unethical practices by mortgage companies and that provide consumers with the information to choose the real estate settlement services most suited to their needs. RESPA helps consumers avoid surprises, like an unexpected fee that appears in your closing documents. The disclosures take place at various times throughout the settlement process. Certain disclosures are required at the time of loan application, before closing occurs, at closing, and after closing.

Mortgages

At the time of purchase, you'll sign a promissory note that legally obligates you to pay back the money you borrowed to buy your house. A promissory note is, in effect, an "IOU." You promise to pay your lender the full amount, payable in equal monthly installments, at the interest rate previously agreed upon. Your lender will keep the original until you completely pay off the loan. In Colorado, the document you sign as a security interest in your house is called either a mortgage or a deed of trust.

Both deeds of trust with private power of sale and mortgages are used as security instruments, or the contracts by which the property is named as collateral for the loan. Mortgages generally require judicial foreclosure, meaning that the lender will have to file an action against you in court to get a judgment for a foreclosure sale, while deeds of trust do not.

Under a deed of trust with a power of sale, the legal title to the property is placed in the name of a third party, called a trustee (usually a title insurance company or an escrow company), and you retain the possession of the property and the right to use it. The deed of trust will contain terms that will allow the trustee to sell your home to pay off the loan without filing an action against you, if you fail to make your loan payments, which saves the lender time and money. Because mortgage terms and rates may vary, it's a good idea to shop around and get the best possible deal.

Private Mortgage Insurance

If you put down less than 20% on a home mortgage, lenders often require you to have "private mortgage insurance" (PMI). PMI is a type of insurance that protects the lender in the event the borrower defaults on the loan, which is a concern if you don't have much equity in your home. PMI covers the gap if the sale of your home in a foreclosure sale might not bring enough money to pay off the mortgage plus the cost of the foreclosure proceedings. PMI is a cost added to the monthly payment of many conventional loans. The loan servicer collects these monthly premiums and pays them to a private mortgage insurance company.

The Homeowners Protection Act of 1998 (HPA) establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value.