Garfield & Hecht, P.C
Selling Mountain Property
Selling Mountain Property
Introduction. This is one of a series of articles available on our website with useful information concerning renting, buying or selling 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; they may not answer or even address questions that may be specific to your particular transaction and they are not a substitute for advice you may obtain from an attorney.
I. Role of Brokers
If you have decided to sell your property, the first step is to select a broker. We generally do not recommend a “For Sale By Owner” approach where a seller attempts to market property without a broker to avoid paying a commission. One of the primary advantages of listing property with a broker is that the property gets into the Multiple Listing Service, which brings the property to the attention of the entire broker community. Brokers also use other resources to find prospective buyers such as affiliations with national networks, open houses, mass mailings, print, radio, internet, television and other forms of advertising. Often the best way to select a broker is based on word of mouth recommendations. Look for recommendations from other sellers that have had a good experience with a particular broker. You should also consider talking to people that deal with brokers on a regular basis such as local bankers, attorneys and accountants.
II. Broker Compensation
Brokers are compensated by earning a commission. This means the broker receives a percentage of the sales price. A broker earns his or her commission by bringing you a buyer ready, willing and able to buy your property at the asking price and getting the deal closed. Typically, Colorado brokers will ask for a commission of 6% on improved property and 10% on vacant land (even though there is no good reason why a seller should pay a higher commission to sell vacant land). Broker commissions can be negotiated, especially for high end properties. A broker will generally ask for a listing for a term of one year. A broker does need time to market your property. High end properties can often take 2 or 3 years to sell. You can consider a listing just for one selling season (i.e., the summer or winter) to see how well the broker performs. You need to be realistic about what brokers can so. In a soft market, even excellent properties listed with a good broker may take a long time to sell. Be sure that you have a clear understanding of your broker’s plans to market your property, including how much money will be spent by the broker for that purpose.
III. Asking Price
After selecting a broker, you will have to decide what price to ask for your property. Your broker will pay an important role in this decision. Your motivation to get your property sold can be an important factor in determining the asking price. An unrealistic asking price may produce little interest in your property. Other resources for determining what to ask for your property are the County Assessors’ website (Pitkin County:www.pitkinassessor.org, Eagle County: www.eaglecounty.us/assessor/index.cfm, Garfield County:www.garfieldcountyassessor.org). Colorado law requires that County Assessors establish market value every two years. On residential property, this is generally based on sales of comparable property going back up to 24 months. Market value and assessment rates are used to establish Assessed Value (7.96% of market value for improved property and 29% of market value for commercial property and vacant land). Colorado real estate taxes are paid based on the Assessed Value of the subject property. Because market value is fixed every other year, and because comparable sales going back up to 24 months are used, the County Assessors’ determination of market value usually lags behind current market conditions and may not be as precise as the conclusions drawn by a private appraiser. Nevertheless, the Assessor’s website is a useful resource. Another resource may be a local appraiser. If you obtained a loan when you purchased your property, the same appraiser who provided the loan appraisal might be available to give an update. If you do not have an old appraisal that can be updated, most sellers do not obtain new appraisals, presumably because of the expense or because the seller does not believe an appraisal is necessary to establish the asking price. In Colorado, there are four levels of appraiser licenses that determine what types of property the licensee may appraise. The four types of licensures available are: Registered Appraiser (a registered appraiser has met certain educational requirements to be Board certified but must be supervised by a supervising appraiser), Licensed Appraiser (a licensed appraiser has met certain educational and experience requirements to be Board licensed and may appraise non-complex residential properties within certain parameters), Certified Residential Appraiser (a certified residential appraiser may appraise certain residential properties without regard to transaction value or complexity), and Certified General Appraiser (this is the highest level of appraiser and qualifies the appraiser to appraise, if competent, all types of property).
IV. Listing Contract
Your broker will have you sign a listing contract, essentially an employment agreement, which sets forth the compensation, length of the listing period and other important terms. There are four general types of seller listing contracts: Net Listing, Open Listing, Exclusive Agency Listing and Exclusive Right-to-Sell Listing. In a Net Listing agreement, the broker contracts to find a buyer at a certain net price to the owner. In this circumstance, the broker will only earn a commission if he or she finds a buyer at the net price. Net listings are generally disfavored on developed property and used only with properties that are speculative in nature. In an Open Listing you can still list your property with other brokers or sell it yourself. With an Open Listing, the broker earns a commission only if the broker brings you a buyer. In an Exclusive Agency Listing, you owe a commission to the broker even if another broker procures the buyer, but you do not owe a commission if you find the buyer yourself. In an Exclusive Right-to-Sell Listing, you owe a commission to the broker no matter who procures the buyer (i.e., a commission is owed even if you or another broker procures the buyer). Most brokers in the Aspen area prefer that you sign an Exclusive Right-to-Sell Listing. If you are already dealing with a prospective buyer or know someone who may want to buy your property, you should make sure that his or her names are excluded from the listing so you will not have to pay a commission on a sale to those persons.
V. Broker’s Relationships
Once you settle on the type of listing contract, the next decision is to determine the nature of your relationship with your broker. There are two choices and the choice is made when the listing contract is signed. A broker can act as a “Transaction Broker” which means the broker will exercise reasonable skill and care in helping you sell your property but the broker is really working for the transaction or for his or her commission. A broker can also act as a “Seller’s Agent”, which means that the broker owes you the utmost loyalty and will advocate for you in helping sell your property. Brokers in the Aspen area generally prefer to act as a “Transaction Broker.” A “Seller’s Agent” may be converted to a “Transactional-Broker” if the buyer has an existing relationship with your broker.
VI. Seller’s Property Disclosure Statement
The listing contract generally requires the seller to provide a buyer with a form called the “Seller’s Property Disclosure”. This form is given to the buyer within a specified period of time after you enter into a contract to sell your property. Some brokers ask you to complete this form when you list your property for sale. We do not think this is a good idea and generally recommend waiting to complete the form until after you sign a contract to sell the property. However, we suggest that when you list your property for sale you carefully read the Seller’s Property Disclosure form to see if there may be any conditions affecting your property that could be a problem later or which you can fix before you have to disclose the condition to a buyer. Consider reviewing your own personal records in advance of the listing to see if you have copies of old surveys, title work, soils report or other documents that affect the property. You may be asked as part of the contract to sell your property to produce this information, and by having it in advance you can share this information with your broker or attorney and discuss any potential issues.
VII. State of Colorado and Federal Withholding Taxes
Many non-Colorado residents are surprised to learn when they sell their property that the lesser of 2% of the sales price or net proceeds of the sale is withheld at closing and deposited with the State of Colorado to be applied to any income tax liability due to the sale of the property. Gain on the sale of Colorado real property is subject to Colorado income tax whether or not the seller is a Colorado resident but there is no withholding if you are a Colorado resident. There are exemptions from this withholding that are beyond the scope of this article. If you are a foreign person selling property then another 10% of the sales price will be withheld and paid to the Internal Revenue Service as a deposit toward any Federal tax liability.
VIII. Tax on Sale of Principal Residence
If you are single, the first $250,000.00 of gain on the sale of your principal residence is tax-free; the balance is taxed at capital gains rates. If you are married and file a joint income tax return, the tax-free amount on the gain increases to $500,000.00. You can sell your principal residence once every two years and obtain this favorable tax treatment. You can rent the home for up to three years after you have moved out before losing this favorable tax treatment. To obtain this tax treatment, the home must be owned and used as your principal residence for at least two out of the five years prior to the sale. There are technical rules beyond the scope of this article that govern eligibility for this gain exclusion or that can cause a reduction in the exclusion amount.
IX. 1031 Exchange
If the property you are selling is investment property you may have an opportunity to defer your gain on the sale if you exchange into a like kind property. You can acquire the exchange property through a qualified intermediary with the proceeds of the property you sell which is commonly referred to as a forward exchange or you can acquire the exchange property first through a qualified intermediary and then sell your property later which is commonly referred to as a reverse exchange. The Internal Revenue Service has strict rules which must be complied with in order to qualify for this deferral. A discussion of these rules is beyond the scope of this article.
X. Contract to Sell
In Colorado, most transactions involve the sale of a home, condominium, vacant land or ranch property where the broker writes the contract on a Colorado Real Estate Commission (the “Commission”) approved form called a “Contract to Buy and Sell Real Estate”. There are five different Commission form contracts depending on the type of property involved in the transaction. These are: (1) Residential, (2) Income-Residential; (3) Commercial; (4) Land; and (5) Colorado Foreclosure Protection Act. Brokers are required to use Commission form contracts but attorneys are not. The contract sets forth all the terms of the sale including names of the buyer and seller, a description of the property, selling price, inclusions and exclusions, other important dates such as when the buyer must notify you if he or she has any objections to the physical condition of the property and when and where the closing will take place. Recent legislation mandates that these contracts contain due diligence provisions, including physical inspection provisions and documents that must be provided by the seller to the buyer. The last of these new due diligence provisions makes the contract conditional on the buyer receiving the various due diligence documents required under the contract. The Commission also provides many other optional forms and addenda to contracts to fit the specific needs of a particular transaction. At the top of the five contracts there is an admonition that it has important legal consequences and you should consult with legal counsel before signing. This is good advice. An attorney can do much more for you if the attorney reviews or prepares the contract before you sign it. There is much less an attorney can do to help you after you have signed the contract.
This is the event where you actually sell or convey your property to the buyer and receive payment of the purchase price. Typically it is the date when you must vacate your property and remove all items not included in the sale. Always keep your homeowners insurance in place until the closing has occurred. Typically the closing will take place at the office of a local title insurance company. Generally speaking, you do not have to be physically present at the closing as many closings occur as “mail in” transactions where the buyer and seller send all their signed documents to the title company before the date of closing. Often the seller’s attorney, the buyer’s attorney and title company representative are the only people physically present at the closing. Having an attorney present is a good idea in the event a last minute problem arises.