…what happens after you have an accepted contract?
So, you’ve submitted an offer and it has been accepted. Now the fun part begins. There are a number of milestones along the path from contract to closing that your Realtor will help you navigate. In this post I will detail those milestones and things to watch out for along the way. But first lets define our terms…1) contract acceptance occurs when both parties mutually agree to all the terms of the contract; 2) closing occurs when the deal is finalized…old loan is paid off, new loan is funded, and the property changes possession from the seller to the buyer. Now for all the stuff in between.
In Colorado, contract to closing usually takes between 30 and 45 days. In that time the seller and the buyer have actions to complete. Here’s a brief overview…
Buyer: Secures financing for the purchase. If not already pre-approved, the buyer will need to apply for financing immediately upon contract acceptance. Pre-approval is a good idea because it removes any doubt of whether the buyer will qualify for a loan. It’s also a good idea because sellers may give preference to contracts submitted by buyers with pre-approval letters. In either case, formal loan application with the final purchase price should be the first step on the contract to closing path. If you are an all cash buyer … never mind.
Buyer’s Lender: Requests Appraisal. Depending on how busy the market, it’s a good idea for the buyer to ensure that their lender is requesting the appraisal well in advance. A good Realtor will be on top of this action for the buyer, ensuring that the lender understands all the dates and deadlines in the contract and is taking the appropriate steps to get the appraisal completed in time for closing. Lenders require an appraisal to ensure that their collateral (the property) is worth at least as much as the money they are giving you for it. Without an appraisal, the lender will not fund the loan, and the path from contract to closing just got a lot bumpier.
Seller provides property disclosure form. This step in the contract to closing process should be completed and provided to the buyer prior to the inspection objection deadline. This disclosure is completed on a standard form issued by the Colorado Department of Regulatory Agencies (DORA), Division of Real Estate. Sellers are required to disclose to Buyers any “latent defects actually known by Seller.” The form is linked here — Sellers Property Disclosure (Residential)
Buyer or Seller orders new Survey. This is required only if the buyer or seller require a survey as agreed upon in the Contract to Buy/Sell. Box selection on the contract determines who (Buyer or Seller) will order and who will pay for the survey. An Improvement Land Certificate (ILC) may also be selected in lieu of a full survey. An ILC costs much less than a full survey. If the Buyer submits an offer on the Contract to Buy/Sell without checking any boxes, and the Seller does not counter checking any boxes, then a survey is not required. Here is the specific portion of the contract:
One thing, though … the lender may require a survey or ILC as a condition of the loan. In that case, the buyer and seller may begin negotiating who will pay.
Buyer orders property inspection. Depending on dates agreed to in the contract, the buyer usually has 1-2 weeks to object to any material defects with the property. The buyer is not obligated to hire a professional property inspector but it is HIGHLY ADVISED. Professional home inspectors are normally much better suited to discover significant issues…from a damaged roof to structural problems with the foundation, the most prudent course of action is to get the help of a professional. The home inspector will look for issues with the electrical system, heating and cooling, appliances, hot water heater, central air, and sewage. In addition, many inspectors are trained and certified to detect elevated levels of Radon, check for mold, and find other household hazards as well. The home inspector may not be able to confirm every issue, but will know when indications justify hiring a more specialized professional to further investigate. For example, the home inspector may note a crack in the foundation, but may not know for sure if the crack has compromised the structural integrity of the home. He will in this case likely recommend further investigation by a structural engineer.
When buyers hire a professional inspector, they have a unique opportunity to accompany the home inspector during the inspection. A good home inspector will go over the findings and may even demonstrate the proper operation of some household systems and appliances.
It really is in the buyers best interest to ensure that a complete and thorough home inspection is completed prior to the Inspection Objection Deadline. In Colorado, if buyers are not satisfied with the home after the inspection, they can request that the sellers remedy any issues or they can terminate the contract. Here is the specific verbiage from the Colorado Contract to Buy/Sell:
“If…is unsatisfactory, in Buyer’s sole subjective discretion, Buyer may, on or before Inspection Objection Deadline: … Notify Seller in writing that this Contract is terminated…”
So, if any inspection items are unsatisfactory, even if seller agrees to remedy the issues, the buyer may still terminate the contract and receive a full refund of any earnest money deposit. The inspection and inspection resolution process is one of the most critical on the path from contract to closing.
Seller (or Buyer) selects title company. Federal law mandates that the buyer has the right to choose the title company. In Colorado whichever party selects the title company also pays for the owner’s title insurance policy. I haven’t seen many buyers submit offers with the “Buyer Selects Title Insurance Company” box checked as it would mean a cost of over $1,000. Especially since the buyer will also be paying for their lenders title insurance policy. Normally in Colorado, the seller selects the Title Company and the Seller pays for the Buyers title insurance. It may seem odd that the Seller is selecting the title insurance policy that will cover the Buyer after the deal is closed, but in most cases the Buyer cares more about not paying for the insurance than who is doing the insuring. The Title Company will conduct a thorough title search of the public records to establish that the Sellers have clear title to the property without any other claims or encumbrances. This is done so that when the contract to close process is completed, the title can be cleanly transferred form the Seller to the Buyer. At that point, the Buyers will become the established legal owners of the property and the title documents filled in the public record. For a closer look at the title process check out this article.
So why title insurance? The title company is providing the buyer and the lender with policies against another persons claim on the property. For example, if the previous owner of the home has an ex spouse or lost relative that turns up claiming ownership of the property, or there are boundary disputes with a neighbor that are unresolved, or if a creditor has place a lien on the property that was not found by the title search, the Title Company will pay to cover costs that would have been the buyer’s. So, the title search and title insurance are critical to peace of mind in the time between contract to closing.
Buyer Check Homeowner’s Association Documents. If the subject property falls under a Homeowner’s Association (HOA), the buyer will need to fully understand how the rules may affect them after they take possession of the property. Most Homeowner associations have what are called Covenants, Conditions, and Restrictions (CC&R). CC&R are are simply the rules of the neighborhood. They specify what you can and cannot do as a homeowner in that community. The CC&R may place restrictions on the color of your house, the type of trees you can plant, or even how many animals you can own — and what kind (no chickens!). Somewhere along the path from contract to closing, the Buyer will want to review and thoroughly understand the rules of the neighborhood. I heard a story about a lady who bought her dream home in a planned community. She and her four Dachshunds were really happy there until she found out the CC&R specified a two dog limit. So, she had three choices … pay an extra $100 per month per dog ($200!), get rid of two of the dogs…or move. As the story goes, she liked her dogs and the $200/mo. more than the new place so she moved. Anyway, you get the idea … as a buyer, know what you are getting into.
Contract To Closing
To find out more on the contract to closing process, continue reading … Closing Day Issues And How To Avoid Them.
About the author: The above article “Contract to Closing…what happens after you have an accepted contract” was provided by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page.
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