Defaulting on a Contract

100 Real Estate Tips in 100 Days (Day 50)

It happens. It's never a good thing, but sometimes life happens, and one of the parties has to default. Before we discuss the worst case demise of a contract, let's speak of how to avoid the situation entirely.

In Colorado, REALTORS® use a state promulgated contract. While in recent years the contracts have been devised to favor the buyer, the great thing is that the contract to buy and sell is a standard and commonly understood document. The contracts have a great deal of explanation and protections for the buyer and seller. There are a few exceptions to the state contracts:

  • most builders use their own contract, drafted by the builders legal counsel, which tends to favor the builder,
  • contracts used by government organizations, such as HUD and the VA,
  • and, massive counter proposal documents used by lenders to sell REO properties and relocation companies to sell transferring employees homes.

In the latter case, it is usually true that a lender or relocation company will receive a contract proposal drafted on a state approved form, then will essentially obviate the contract with a lengthy and complex counter proposal. There is absolutely no legal consistency in these type of documents (excepting that such counter proposals and addendum's favor and protect the seller), and a buyer may wish to consider engaging legal counsel in such situations.

Buyers have many opportunities to disengage from a contract without actually defaulting. A buyer may terminate a contract based on physical inspections issues, title or association concerns, difficulties in obtaining hazard insurance, or mortgage loan difficulties. The simple fact is that there are many honest and perfectly tolerable reasons for a buyer to terminate a contract with the expectation of having their earnest money returned, and suffering no further complications. As long as the buyer observes the agreed upon deadline dates, and acts in a proper and timely way, there are very few cases where an actual default should occur. It does happen however, and the buyer should understand that an improper termination can be considered by the seller a default, and the buyer's earnest money is in peril. This is another situation where the buyer should consult with legal counsel before proceeding. Buyer's should be aware of the action dates in the contract, and demand compliance from third party actors such as mortgage lenders.

The important thing for the seller to remember is that real estate sales contracts are specific on the part of the seller. That means the seller cannot easily withdraw from the contract without exposing herself to a demand for reparations, which may go beyond just returning earnest money.

Consumers should be aware that Colorado contracts are date specific, and the consumers (and their agents) must comply with the agreed upon dates or expose themselves to unnecessary difficulties.

Subscribe to Denver Dwellings

This information is not intended to be legal advice. Please use it as a guideline only and consult an attorney for counsel if necessary.