Garfield & Hecht, P.C
Purchasing Mountain Property
Purchasing Mountain Property
Introduction. This is one of a series of articles available on our website with useful information regarding the renting, buying or selling of mountain property. Reading any one or more of these articles does not make you a client of this firm or constitute legal advice. These articles are all very general in nature; may not answer or even address questions that may be specific to your particular transaction and is no substitute for advice you may obtain from an attorney. Click the headings below to open each section of the document.
I. Brokerage Relationships.
You will likely work with a real estate agent to find and purchase your new property. Colorado law provides two different brokerage relationships for the buyer:
A. Seller’s Agent.
A Seller’s Agent (or Listing Agent) is a broker who represents only the seller in a real estate transaction. A Seller’s Agent owes certain fiduciary, disclosure and confidentiality duties to the seller. Traditionally, agents in a transaction were Seller’s Agents. However, Colorado law now allows other agency relationships that are more beneficial to buyers.
B. Buyer’s Agent.
A Buyer’s Agent is a broker who represents only the buyer and owes certain fiduciary, disclosure and confidentiality obligations to the buyer. However, the Buyer’s Agent is usually paid by the seller. This is the agency relationship that is most beneficial to you as a buyer, but some brokers are unwilling to act as a Buyer’s Agent without some commitment or consideration from the buyer. Also, a broker cannot act as a Buyer’s Agent with respect to any property for which the broker is also the listing agent.
C. Transaction Broker.
A Transaction Broker is a deal maker without being an agent or advocate for any of the parties involved and owes few duties to either the buyer or the seller. A real estate broker is presumed to be a Transaction Broker unless another agency relationship is established through a written agreement. Therefore, we recommend that you establish, in writing, another more beneficial brokerage relationship with your agent (i.e., a Buyer’s Agent relationship). However, you should not let the legal relationship with your broker stand in the way of a good buying opportunity.
II. Contract to Purchase.
Typically, you will make an offer to purchase property by submitting a form approved by the Colorado Real Estate Commission (the “Commission”) called a Contract to Buy and Sell Real Estate. There are five different Commission-approved contract forms depending on the type of property involved. It is compulsory for all real estate brokers licensed by the State of Colorado to use these Commission-approved form contracts, and they contain the basic terms of the transaction, including party names, purchase price, financing arrangements, legal property description, and possession date. These contracts also contain various due diligence requirements such as physical inspection of the property at the buyer’s option and various documents a seller must give to a buyer. The new form contracts expressly condition the closing upon a buyer reviewing and approving the various due diligence documents. A broker must also attach certain supplemental, Commission-approved forms to the standard sales contract as appropriate to the transaction or circumstance. For example, a broker is required to attach the Source of Water Addendum to all sales contracts and the Lead-Based Paint Disclosure if the residential dwelling was built prior to 1978. Because all of your rights and obligations in the purchase will be governed by the contract, it is important that it protects your interests. You should consult your attorney before you sign the contract. Additionally, your attorney may supplement the standard contract form with additional provisions to address your particular circumstances.
If your purchase involves significant contingencies, multiple properties, unique representations and warranties, post-closing obligations, or specialized due diligence and remedy provisions, it may be beneficial to have your attorney draft a non-form contract that is more particular to your transaction. Your attorney is not similarly restricted by the Commission to use the approved sales contracts or supplemental forms.
III. What a Buyer Should Know.
What follows are some of the considerations a buyer should know about:
A. Financing Contingency.
A financing contingency allows you to terminate the contract and have all earnest money returned to you if you are unable to obtain the necessary financing. If you are using a Commission-approved contract this financing condition is written into the contract. If an attorney drafts your contract, then we recommend inclusion of such a provision in the event favorable financing or loan conditions cannot be acquired.
Unless you are buying a condominium, the seller should provide a survey of the property containing the legal description for the property as well as showing all property boundaries and the location of improvements, including fence lines. It is especially important to obtain a full Improvement Survey, as opposed to a less expensive and less informative Improvement Location Certificate. Depending upon your special needs, the age of the improvements and history of the property, it may be worthwhile to obtain a full Improvement Survey even in a situation where the title company will issue survey protection based merely upon an Improvement Location Certificate. Survey protection should cover the harm you suffer as a result of any encroachments or boundary line conflicts not shown on the survey.
In general, the contract should require the seller to convey the property to you via a general warranty deed, which guarantees against all title defects arising before or during the time the seller owned the property, and to provide a title insurance policy for the property containing only those exceptions to title approved by your attorney during the due diligence period. Consult with your attorney before accepting a special warranty, quitclaim, or any other form of deed.
D. Seller Representations and Warranties.
You may want to obtain representations and warranties from the seller that are not contained in either the standard Commission contract forms or the Seller’s Disclosure discussed below. The new Commission-approved contracts contain pre-printed language regarding various representations and warranties. These include such items as mandating that certain properties contain carbon monoxide alarms (applicable to properties with fuel-fired heater or appliances, a fireplace, or an attached garage and include one or more bedrooms). The City of Aspen Code and Pitkin County Code regulations also contain provisions that mandate carbon-monoxide detectors for properties used for residential occupancy.
E. Transfer Tax.
You may be surprised to learn that over and above the purchase price for your property, you may be required to pay a real estate transfer tax. If the property is located in a jurisdiction that imposes a transfer tax, the contract will allocate responsibility for payment of the tax. Generally, the tax is payable by the buyer unless the parties agree otherwise. Real estate transfer taxes are imposed on sales of property within the city limits of Aspen, Snowmass Village, Vail, Minturn, Avon, Beaver Creek, Gypsum, Telluride, Crested Butte and Winter Park. Similarly, some homeowners associations impose transfer assessments on sales of property governed by the association. In the case of certain transactions (e.g., gifts to children), there may be an exemption available from the tax or assessment. Consult the applicable transfer tax or transfer assessment language to determine whether you qualify for an exemption.
F. Earnest Money.
The amount of earnest money varies by area, purchase price and type of transaction. The contract should provide for interest to be earned on your earnest money by requiring it to be placed in an interest-bearing account.
IV. Homeowner Protection Act of 2007.
A sales contract entered into between you and a builder/developer for the purchase of any home should include certain rights, remedies and damages for construction defects. If it does not, the Homeowner Protection Act of 2007 may help to preserve your legal rights and remedies available to you under Colorado law. This Act will render unenforceable any attempt by a builder/developer to require you to waive construction defect claims, waive warranty claims, and limit the type and amount of damages for construction defects. It applies only to residential property and not to commercial property transactions. Consult your attorney before agreeing to any waivers, releases, exculpatory clauses, and limitations of liability arising from a residential construction defect.
V. Due Diligence Review.
During the due diligence period, you will want to examine the following aspects of the Property:
You want to have clear and marketable title to the property. The seller will provide a title insurance commitment listing all recorded documents affecting the property. You should obtain copies of all of these documents and have your attorney review them for potential problems such as (i) easements burdening the property, (ii) restrictive covenants limiting use of the property, (iii) lack of access to the property, (iv) severed mineral rights, (v) current leases, (vi) existing debt and (vii) special improvement districts affecting the property.
B. Water Rights.
Water rights are not always associated or conveyed with the land. Therefore, it is important to determine whether the property has a legal and physical supply of water sufficient for your anticipated uses. It is also important to ensure that any water rights associated with the property are validly conveyed with the land. The property may receive domestic water from one of the following sources: (i) local government water supplier, such as a municipality or special district; (ii) water system owned and operated by a homeowners association; (iii) water system shared with other property(ies); or (iv) private water rights and/or a well associated with the property. If the property is served by a local government water supplier, the water rights are owned by the water supplier and will not be conveyed with the land. It is not always necessary to have an attorney evaluate the legal sufficiency of such water rights, but you should review any rules and regulations affecting the use of water provided by a local government supplier. If you are purchasing property served by private water rights – whether owned by a homeowners association, shared with neighbors, or independently associated with the property – you should engage an attorney to evaluate such water rights for your intended uses. You should also test the quality and quantity of the domestic water supply during your inspection of the property. If the property is vacant land, it may have no existing water rights or supply. If you are buying land that is not served by an existing well or water rights, you should engage an attorney specializing in water law to investigate the ability to obtain a legal and physical supply of water for the property.
C. Mineral Reservations.
Colorado has a mineral-rich history that may impact the purchase of your mountain property. The Colorado Territory was originally created near the end of the Pike’s Peak Gold Rush of 1858-1861, during which mining towns such as Denver City and Boulder City were built by immigrants searching for gold. Colorado experienced a second great mineral boom twenty years later, when silver was discovered in Leadville in 1879. Today, Colorado is in the midst of an oil and gas boom, with active wells in two-thirds of Colorado counties totaling more than 25,000 active wells in the state. This makes it important to know who owns the minerals underlying an available property. Under Colorado law, the surface estate and mineral estate can be “severed” into separate estates, creating two distinct bundles of rights. Often, different parties own the surface and the subsurface, commonly referred to as split estates. The different ownership may have been created through the reservation of the minerals to the government when the lands were originally patented, or it may result from a decision by a previous landowner to separately sell or lease the subsurface mineral interest. For example, major portions of Colorado were settled under the Stock Raising Homestead Act of 1916, which allowed homesteaders to use the land for grazing instead of traditional farming but also reserved all minerals to the United States. These federally-owned minerals are subject to exploration and development under public mining claims and/or oil and gas leases. The State of Colorado owns the minerals under several sections of land that were vested in the State upon statehood in 1876 for the benefit of public schools. While the State has sold some of the surface estate over the years, it has retained title to all of the minerals, which it leases in order to raise funds for schools. Finally, private landowners who obtained both mineral and surface title may have sold or traded surface estates and reserved severed minerals as a speculative stake in the future. The owner of a mineral estate generally has the right to access and use the surface estate to the extent necessary to develop the mineral estate, even without the surface owner’s permission, and is only liable for surface damages under certain circumstances. Colorado law requires title insurance companies to provide written notice in the title commitment if it determines that the mineral estate has been severed from the surface estate. If the mineral rights have been severed from your property, you should consider obtaining an endorsement to your title insurance policy protecting against certain damages caused by the development of severed mineral interests. You may also wish to investigate whether there are any current mineral leases or mining claims on your property and/or consult an attorney about options for purchasing or limiting development of the mineral estate.
D. Physical Issues.
You should engage an independent, professional inspector to examine the physical aspects of the property. Generally, an inspector checks the (i) electrical system, (ii) plumbing and waste disposal systems, (iii) water heater, (iv) insulation and ventilation, (v) heating and air conditioning systems, (vi) water source and quality, (vii) potential for pests, and (viii) foundation, doors, windows, ceilings, walls, floors and roofs. You should also have the home inspected for radon gas, asbestos, mold, lead or any other biological contaminant that might be found in older homes. An inspection clause in the sales contract should give you the opportunity to back out of the contract if the inspection discloses serious problems or specify that the seller either fix certain problems or make monetary concessions for any problems before you will purchase the property.
E. Environmental Hazards.
As a result of Colorado’s mining heritage, many of our resort towns are built on or near old mines, and the old mine tailings can contain hazardous materials. Property previously used for agriculture may have contained fuel storage tanks, and some fuel may have leaked into the ground. In addition, radon gas levels can be fairly high in many areas of Colorado. Consequently, before you buy property, you should examine the history of its use and have radon gas levels tested in the dwellings on the property. If the property’s history indicates mining activity, the presence of storage tanks or neighboring properties with environmental issues, you should consider having a Phase I environmental assessment performed on the property to ascertain the presence of environmental problems.
F. Land Use Approvals.
You will want to determine that the property has all the necessary governmental approvals for its current use. Try to obtain a copy of the original building permit and certificate of occupancy for improvements built on the property. In addition, if you are planning to build on or renovate the property, your attorney should determine that the necessary approvals have been or will be received. Some of the mountain resort communities have unique land use controls relating to growth management, employee/affordable housing, preservation of historic structures and special districts which may limit the development or renovation of your property.
If a survey is obtained for the property, it should be examined for (i) any encroachments of improvements onto, or from neighboring properties, (ii) access to a public road, (iii) the location of easements affecting the property, (iv) whether applicable setback requirements are satisfied and (v) whether the legal description matches the legal description contained in the contract, title commitment and deed.
If you buy an existing structure, investigate the cost for utilities in the past 12 months. Electricity, gas and water in some areas can be quite expensive. If you buy vacant land, you should investigate the availability and proximity of utility connections.
VI. Common Interest Ownership Act.
If you are going to buy a townhome, condominium or home within a homeowners association that was developed after July 1, 1992, the property will most likely be covered by the Colorado Common Interest Ownership Act (“CCIOA”). This Act as recently amended provides that, on or before the date by which you will receive title documents, you are also entitled to receive copies of the homeowners association declaration, bylaws, rules and regulations. You should have your attorney review these documents to ensure that the plats, maps and declaration comply with CCIOA. You should also have your attorney make certain that the homeowners association is not involved in any litigation and has met all of CCIOA’s statutory requirements. Where a broker is involved, you will be asked to sign a receipt for these documents. This receipt may also disclose an obligation to pay assessments and to obtain architectural review and approval prior to any exterior changes to the property.
VII. Seller’s Property Disclosure.
Where a broker is involved, you will receive, by the date set forth in your contract, a Seller’s Property Disclosure. There is now one disclosure form for all types of properties. The form is five pages and covers a range of pertinent facts, such as roof, plumbing, foundation, insect, lead paint, mechanical, water, utilities, zoning, access and environmental conditions. This form is to be signed and dated by the seller and should be informative about the property you are buying; however, it is not a substitute for hiring an inspector.
VIII. Special Taxing Districts.
There is also a separate taxing district disclosure required under Colorado law. This “special taxing district” disclosure is meant to notify a buyer that some properties may be located in these districts and that property owners may be subject to increased taxes. The disclosure puts the buyer on notice to investigate the taxing district of the property in order to determine what taxes a potential purchaser may be subject to.
At closing, you should receive the following documents:
A. Deed Conveying the Property.
The deed should contain the proper legal description for the property, any water rights and all easements benefiting the property. The deed should also provide warranties from the seller regarding title to the property. The new deed should be recorded in the land records office in the county where the property is located. Sometimes it is better to have a separate deed for the water rights. If the purchase includes shares of stock in a ditch or reservoir company, be sure to consult with an attorney regarding the necessary transfer documents.
B. Bill of Sale and Assignments.
The Bill of Sale conveys any personal property, such as refrigerators, washers, and dryers. You should also be assigned all warranties, well permits and other contract rights of the seller relating to the personal property included in the transaction.
C. Title Insurance Policy.
The title insurance policy should contain the proper legal description for the property and only those exceptions to title that have been approved. It should also include any requested endorsements to the title insurance policy for matters such as mineral reservations and mechanics lien protection.
D. Other Closing Documents.
The following documents should also be delivered at closing:
(i) Settlement Statement, itemizing all monetary items, including closing costs;
(ii) Real Property Transfer Declaration. This form is used by the property tax assessor for valuing the property;
(iii) Certificate of Non-Foreign Status of Seller. This form requires the seller to provide you with an affidavit declaring that the seller is not a foreign person or entity. If no such affidavit is provided, you are required to withhold from the closing proceeds 10% of the purchase price;
(iv) Colorado Department of Revenue DR 1083 requiring a 2% withholding from the purchase price for out-of-state sellers; and
(v) Affidavit of Real Estate Transfer Tax, if applicable. This form may be used to accompany the Real Estate Transfer Taxes paid to the city’s finance department just prior to recording the deed.