Using Option Agreements for Short Sales in Colorado

Transcription

1 Using Option Agreements for Short Sales in Colorado Explanation -- Analysis -- Forms Gregory C. Parham, Esq West Jefferson Avenue, Suite 180 Lakewood, CO COPYRIGHT 2008 INVESTORADVANTAGE.NET ALL RIGHTS RESERVED

2 DISCLAIMER This publication is designed to provide accurate and Authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal or other expert assistance is required, the services of a competent professional person should be sought. Your results will vary from those of the author and/or other students mentioned in this course. The Author specifically disclaims any liability, loss, or risk, personal or otherwise, incurred as a consequence directly or indirectly of the use and application of any of the techniques or contents of this guidebook. From a declaration of principle jointly adopted by a Committee of the American Bar Association and a Committee of publishers. The forms contained herein are designed for experienced investors who are familiar with short sale transactions and the provisions of the Colorado Foreclosure Protection Act You assume all of the risk in using the forms or relying upon the information contained herein, and without the Author s liability of any kind, even if the contents are incomplete or erroneous. PAGE 2

3 1. Options in a Nutshell 2. Explanation of the Forms MANUAL CONTENTS a. Option Contract b. Notice of Right to Cancel c. Seller s Acknowledgement d. Notice of Option for Sale & Purchase e. Notice of Intent to Exercise Option f. Notice of Release of Option 3. Anatomy of an Option Transaction 4. Forms a. Option for Purchase & Sale Agreement (For Short Sale) b. Notice of Right to Cancel c. Seller s Short Sale Acknowledgement d. Notice of Option for Sale and Purchase e. Notice of Intent to Exercise Option f. Notice o Release of Option PAGE 3

4 OPTIONS IN A NUTSHELL Land developers and other real estate investors have used option contracts to purchase real estate for years. Used correctly, option agreements can be an effective way to lock up real estate. So, what is an option? An option in the context of real estate is an agreement between buyer and seller where the buyer pays the seller money for the option to buy the property at a later date. Generally, the option agreement gives the buyer an exclusive opportunity to buy the property as long as the buyer completes the transaction (exercises its option) before the option period expires. Options prove particularly useful in real estate transactions where the buyer needs to determine more information about the property before paying the entire purchase price. This is why options are common with land development transactions. If a buyer purchases the property and later finds out that it cannot be developed as the buyer had intended (and the profitable way) the buyer loses big time. With an option the buyer can pay its option fee to lock up the property and then after it determines the land can be developed, the buyer can exercise the option and purchase. Another reason buyers like option agreements is because they can usually record a notice of option or the option agreement itself with the county clerk and recorder which puts the public on notice of the buyer s contractual right to purchase the property. While option agreements can contain just about as many terms as people can conjure, option agreements are usually structured in one of two ways. First, some option agreements contain only the option and leave the terms of the actual contract for later negotiation. Under this type of an agreement the buyer may pay PAGE 4

5 an option fee to the seller to allow the buyer to purchase a piece of property in the future. The option agreement would state that the parties will enter into a purchase agreement after the buyer has given notice of its intent to exercise the option. Other option agreements, such as the form included in this manual, combine the option terms with all the remaining terms of the purchase contract. Under this type, the buyer purchases an option and then later when the buyer notifies the seller of its intent to exercise the option, the terms of the original document will govern the final sale. Anyone engaging in option purchases should review applicable real estate laws. Certain activities are deemed option dealing and may only be conducted by licensed real estate professionals. PAGE 5

6 OPTION CONTRACT To comply with the Colorado Foreclosure Protection Act (CFPA), the contract must be written in the language used by the Seller. If the Seller speaks a different language you need to have the contract in English as well as the Seller s language and have it certified by an interpreter. Paragraphs 1 and 2 of the contract identify the parties, the option fee, and the property. Make sure the parties to the contract match the property owners. The option fee is not the purchase price. The option fee is merely the fee the buyer is willing to pay to have the option to purchase for a given time period. PAGE 6

7 Since the Option for Sale and Purchase is designed for short sales, the document contains several paragraphs explaining the short sale and explaining that the purchase is contingent upon successful negotiation of the short sale. Paragraph 3 should identify the outstanding liens on the property. Paragraph 4 identifies the purchase price. You will notice that paragraph 4 explains that the price may be adjusted as the short sale negotiations take place with the Seller s lenders. PAGE 7

8 Paragraph 5 allows you to identify the inclusions and exclusions for the property, such as appliances, sheds, etc. If you don t have any, make sure to write in N/A. Paragraph 6 sets for the time period during which Buyer must exercise Buyer s option to purchase. This must be completed. If the time period expires you can always amend your agreement to extend the option period with agreement between the parties. PAGE 8

9 Paragraph 8 contains several representations of the Seller. The representation in Paragraph 8.A is useful when you are buying a short sale property and then flipping it. If you re buying and holding you can modify the paragraph accordingly. Paragraph 8 also contains a section required by the CFPA concerning assumptions of liens/debts. Make sure to complete the highlighted areas. PAGE 9

10 Paragraph 11: Closing costs and prorations are items often neglected in many investor purchase contracts. In most short sales the Seller will be paying all of the costs, which are usually built into the total net received by the Seller s lender. However, this form allows you to specify who pays what for closing costs. Paragraph 22: Since this Option for Sale and Purchase is for a short sale, it contains the statutory right to cancel. Note that the right to cancel is a 3 BUSINESS day right to cancel. Until expiration of the 3 days your contract is not valid. Take care to fill this portion out correctly. You are also required to leave a separate and detached notice of right to cancel with the seller. PAGE 10

11 ATTACHMENTS TO THE OPTION FOR SALE AND PURCHASE There are two forms attached to the Option for Sale and Purchase. The Notice of Right to Cancel This form is required by the CFPA. It should be DETACHED from the contract. The purpose is to make it easy for the Seller to cancel. PAGE 11

12 Seller s Acknowledgment Form. This form is designed to notify the Seller of the nature of the short sale transaction and Buyer s role with respect to the transaction. You can always modify your disclosures about your role as the Buyer as you wish. This document is intended to make it clear to the Seller that you are not the Seller s advisor, that you stand to profit from equity in the property, and that the Seller is encouraged to seek legal and tax counsel as appropriate. PAGE 12

13 NOTICE OF OPTION FOR SALE AND PURCHASE Once you have fully executed the Option for Sale and Purchase Agreement (and the 3 day right to cancel has expired) you may record the agreement itself, or you may record a notice of the agreement in the form of the Notice of Option for Sale and Purchase with the county clerk and recorder. Recording the notice or agreement is not necessary to make your option agreement enforceable. Recording makes sure that anyone examining the property records will see that you have an option to purchase for a specified period of time. Make sure the notice identifies the correct legal description, parties to the agreement, and the option period. PAGE 13

14 NOTICE OF INTENT TO EXERCISE OPTION The Option for Sale and Purchase Agreement requires that you provide notice to your Seller of your intent as the Buyer to move forward with the purchase by exercising your option. This might be done, for example, after you have obtained a favorable negotiated payoff with the short sale lender and you re ready to close. Make sure you complete this step so that nobody can argue that you waived your right to close. PAGE 14

15 NOTICE OF RELEASE OF OPTION If Buyer decides not to exercise its option to purchase --because the short sale cannot be negotiated at the right price, property condition, etc. -- Buyer should deliver a fully executed Notice of Release of Option to the Seller. If the Notice of Option or the Option Agreement itself has been recorded, Buyer should record the Notice of Release so that the property title is not clouded by the previously recorded Notice of Option or Option Agreement. PAGE 15

16 ANATOMY OF AN OPTION TRANSACTION Buyer & Seller Enter into Option for Sale and Purchase Buyer Records Option or Notice of Option Buyer Decides Whether to Purchase No Buyer Gives Seller Notice of Release Buyer Gives Seller Notice of Intent to Exercise Option Buyer and Seller Close the Sale PAGE 16