OK…so we have a Buyer and a Seller who signed a contract for the sale of a home yesterday and last night the Buyer woke up out of a sound sleep, sat bolt upright and screamed “What am I doing?! That crafty Realtor has my earnest money and is probably making reservations for Cabo San Lucas right now. I’m toast!”
Meanwhile, the Seller is sleeping soundly and dreaming of the new minivan he’s going to buy with the money from selling his house. “I’m set…nothing can go wrong, I’ve got a contract. The Buyer has to buy or I get his earnest money. Should I get the red one with the flames or the blue one with the flying unicorn mural?”
Guys, you’re both wrong. Didn’t your Realtor tell you about THE THREE BIG OUTS? Well, listen up.
Every Colorado Real Estate Commission approved contract has several ways for Buyers to go under contract for a property and still have time to investigate and terminate the sale with no penalty.
BIG OUT #1: The Inspection. By a certain date in every contract, Buyers have the right to have an inspection done (or not) and either terminate the contract or present a list of things they want corrected by the Seller. If that list is not negotiated out in writing by a second date, the contract automatically terminates and the Buyer is gone if she wants to be.
BIG OUT #2: The Title and Homeowner’s Association Documents. All the title and HOA documents for the property must be delivered to the Buyer by a certain date. By a second date, the Buyer may object to the title and/or HOA documents. If the association documents are not acceptable, the Buyer is out of the deal automatically upon notice to the Seller. Let’s say he wants to rent the property out but the association documents forbid rentals. He’s gone if he wants to be.
BIG OUT #3: The Loan. After receiving notice of loan approval from the lender, usually just before closing, the Buyer may still terminate if, in her sole judgment, she doesn’t like the loan.
These are just the BIG OUTS. There’s several little ones, too.
Generally, Buyers are well protected by our Colorado contracts… if they pay attention to dates.
Sellers always take the risk that one of these outs will sink the contract. The best we can do is to cut the exposure time for these contingencies. We try to get the inspection and title objection deadlines out of the way in a couple of weeks or less. The loan deadline will always be the longest exposure, but pre-qualification or pre-approval by a lender can lessen that risk.
To lose any earnest money, the Buyer has to be oblivious to the process, miss all the dates, not make loan application, buy a new pickup truck the week before closing or just not show up to close. It happens, but rarely.
That’s why your crafty Realtor rarely vacations with forfeited earnest money and Sellers shouldn’t get too excited about the minivan before closing.