Colorado Contracts and Regulations

Introduction

Foreclosure is the process of the lender taking title to the property from the owner because some default in complying with the terms of the security instrument – usually delinquent payments.

Foreclosure is cyclical, normally following the business cycle, i.e. good times = low foreclosure and hard times = higher rate of foreclosure.

Foreclosure does not happen immediately. It is normally the lender’s last resort. Lenders do not like to be property owners. First there will be one or a series of missed, partial or late payments. The lender will respond with varying degrees of warnings and may offer to reconstruct the loan to make payments lower. But at some time, when it becomes either painfully obvious that the debt is a lost cause or the lender loses patience, foreclosure will be initiated.

The first step in foreclosure is the  lender (beneficiary in the deed of trust)  filing a notice of election and demand for sale with the public trustee. Along with the filing, the lender furnishes the original promissory note, original trust deed, a “combined notice” and a mailing list of persons who appear to have an interest in the property (including the owner and occupant). The lender has 60 days to update this list. The public trustee may require a money deposit (max $500) along with the filing to help defray the costs of processing the foreclosure.

LAW READING ASSIGNMENT

Click here to read the following section in the  Colorado Revised Statutes :

· CRS 38-40-103 

By the end of this unit, you will be able to:

· List and explain the various types of liens

· Explain the purpose of Errors and Omissions Insurance

· Discuss Water Rights

· Recognize the provisions of the Landlord Tennant Act 

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Foreclosure

The public trustee must  record the notice within 10 working days of filing, and within 20 days  mail the "combined notice" to everyone on the lender's mailing list.

"Combined" refers to the notice containing the announcement of the intent to foreclose, the proposed date of the foreclosure sale, the borrower's right to cure (pre-sale), and the lien holder's right to redeem (post-sale) all in the same notice. This notice, and adjustment of the sale date, must be re-mailed each time the lender provides an updated list of persons of interest.

The public trustee must also  publish the notice in a general circulation newspaper once per week for 5 weeks, and must review the actual publication for accuracy.

Meanwhile, the lender must seek a court order for the foreclosure to be authorized. This is known as a  Rule 120 hearing (so named for being held under Rule 120 of the Colorado rules of civil procedure). At this hearing, the borrower has the right to present any extenuation or reason the foreclosure should not be authorized. In the real world, the borrower often chooses to not participate in this hearing.

The  court order must be dated at least 16 days prior to the date of sale, and the lender must deliver the court order resulting from the hearing to the public trustee not later than 12:00 noon two business days prior to the scheduled sale date.  A sale held without a court order is invalid.

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Foreclosure (continued)

In Colorado, different from other states, the owner has  no right or period to redeem the property after the foreclosure sale. Rather, the borrower has an extended time to cure the default prior to the sale.

For urban property, the right to cure time was extended from 45-60 days up to 110-125 days. This time extension was intended to give the borrower more time to square things with the lender. For agricultural property, the time to cure is 215-230 days after filing the notice of election and demand for sale. 

If the property owner intends to cure the default, he or she must notify the public trustee of said intent not later than 15 days prior to the set sale date, AND deliver the payments in full by 12:00 noon one business day before the sale date.

After the foreclosure sale, only lienors of record as of the filing date of the notice of election and demand for sale may redeem the property. Anyone lienor intending to do so must notify the public trustee within 8 days after the sale.

At the end of the process, the public trustee sets up a schedule of lienors who have met the 8 day filing deadline, from junior to senior. Each successive lienor has 5 days in which to redeem the property from the previous lienor, with the first mortgage lender usually being last in line. When all of these claimants have exercised their rights to redeem, the public trustee issues a  Confirmation Deed.

As you can tell, the foreclosure process is complex and lengthy. The Colorado Foreclosure Protection Act permits real estate brokers to assist homeowners without being categorized as foreclosure consultants. However, that assistance must not harm the owner/borrower. Make sure your client has competent legal counsel whenever working with foreclosures.

 

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Liens and Encumbrances: General Property Taxes

Property taxes for the previous year are an  annual lien against property as of January 1 each year. If delinquent, they are a perpetual lien against the property until sold. Property taxes are known as "ad Valorem," Latin for "according to value" - as opposed to being a flat fee or established by another measure.

Real estate property taxes are imposed by taxing "entities" or "districts"  at county and local levels of government. Examples of these include school districts, fire protection districts, etc. Normally, the county treasurer collects all the taxes due and then divides the money among the multiple entities.

There are no federal property taxes as the U.S. Constitution prohibits such a tax. The federal government does tax income received from real property operations and profits obtained when a property is sold. The federal government may also impose a  federal tax lien against real and personal property for failure to pay any other federal tax when due.

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Liens and Encumbrances: General Property Taxes (continued)

State governments do not usually levy property taxes, but may impose tax liens for failure to pay real property taxes delegated by the state to the county or local government. State government sets the assessed value of property, currently at 7.96% (residential) and 29% (commercial, agricultural, etc.) of the last two year's actual value. 

County and local governments then set a  mill levy (one thousandth of a dollar or .001) which is a multiplier used with the assessed value to calculate the actual tax dollars owed. 

Assessed Value x Mill Levy = Tax Liability (AV x M = T)

The tax rate is usually expressed in terms of the mill levy; (Move the decimal point 3 places to the left: 61 mills = .061)

However, it may also be expressed as:

· Percentage (Move the decimal point two places to the left: 6.1% = .061)

· Dollars per $10 of assessed valuation (Divide the assessed value by 100 to get the rate per $1: $6.10 per hundred dollars = $6.10 ÷ 100 = .061)

· Dollars per $1,000 of assessed valuation (Divide the assessed value by 1,000 to get the rate per $1: $61.00 per $1,000 equals $61 ÷ 1,000 = .061)

 

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Liens and Encumbrances: General Property Taxes (continued)

Last year's property tax may be paid without penalty according to one of two schedules at the taxpayer's choice.

a. Pay the entire tax bill before April 30, OR

b. Pay ½ on or before the last day of February, and the remaining balance in full by June 15.

Tax penalties at the rate of 1% per month begin to accrue the day after the due date. For example,  a delinquent 1st one-half payment accrues interest at 1% per month beginning March 1st and continues until paid, unless paid in full by April 30th.

Delinquent property tax sales begin with a warning mailed to delinquent owners on September 1 each year.

The county treasurer then  publishes a list in a newspaper of general circulation of the delinquent properties and the amounts owed on each. The list must be published no later than 4 weeks before the  sale date, which is the second Monday in December each year. (You may have seen this. In the city and county of Denver it is often larger than the paper itself!)

At the tax sale, the highest bidder over the taxes due receives a  certificate of purchase. After three years of current tax payments, during which the delinquent taxpayer may redeem by paying the tax bill plus a set rate of interest, the highest bidder may apply for a  treasurer's deed and has free and clear ownership of the property.

The same County Commissioners that determined the mill levy meet as the  County Board of Equalization to hear appeals filed with the county assessor by property owners who feel their tax assessment was unjustified.

The State Board of Equalization receives higher-level tax protests, but primarily reviews assessments statewide in an effort to make assessments fairly applied.

 

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Liens and Encumbrances: Other Liens

Lien Types

A lien is the right to have an obligation settled by sale of the debtor's property. Real property tax liens take priority and are paid first over all other types - including IRS federal tax liens. 

Voluntary v. Involuntary

A person voluntarily creates a lien by taking a mortgage secured by real estate. 

An involuntary lien is one placed against a property through a legal process adverse to the property owner.

Statutory v. Equitable

Too easy, but a statutory lien is involuntarily imposed by law, for example, an estate tax lien.

An equitable lien is also involuntary, but is imposed by court order - for example: a judgment lien placed on all of the owner's personal and real property to secure payment of a monetary judgment.

General v. Specific

A general lien is one placed against all property of a debtor, regardless of location.

A specific lien is placed against a named single property item, such as a conventional mortgage lien placed on the secured property only.

Mechanic's Liens

A mechanic's lien is voluntary, specific, and equitable.  It is placed to secure payment for labor and materials used in improvements to real property.

Vendee's Lien : voluntary, specific, and equitable. This is also known as a purchaser's lien and is filed against a specific real property to secure return of moneys due to the purchaser after a seller defaults on a buy/sell contract.

Vendor's Lien:  Secures a purchase money mortgage - a seller carry-back used to finance the sale of a property. Also known as a seller's lien.

 

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Errors and Omissions Insurance

Colorado is one of a dozen or so states that requires "errors and omissions" (E&O) insurance in order to hold an active real estate license.

Commission Rule D-14 sets out the minimum requirements for coverage of all acts requiring a license.

The Real Estate Commission enters into a contract with an insurance provider to provide a group policy throughout the state. 

Insurance is required for both individual and entity licenses. For example: a single broker with his or her business organized as a Subchapter S corporation or an LLC, must have TWO (2) E&O policies - one for the broker and one for the company.

Licensees may obtain E&O insurance independent of the state's group policy from any insurance provider as long as it meets the minimum requirements in the rule.

New licensees should always check with the employing broker as to the method of securing E&O insurance within the firm.

Neither E&O insurance nor any type of insurance can protect against illegal activities.

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Land Descriptions - Surveys and Improvement Location Certificates (ILC's)

Surveys and ILC's are the most desirable method of determining accurate property boundaries. Surveys tend to grow in importance with the size and rural nature of the property. 

Surveys are known also as  pin and stake surveys, for the fact that the surveyors place permanent pins or stakes in the ground to permanently mark the boundaries of the property.

A survey is a complete measurement and diagram or plat of a property. It is far more thorough than an improvement location certificate, which only shows the approximate placement of the major improvements on the property with respect to the boundaries. For the additional detail and measurement, a full survey is also far more expensive than an ILC.

An ILC is almost always the minimum required by any lender in a residential real estate transaction.

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Water Rights

It is safe to say that water is the most precious commodity or natural resource in Colorado. Its scarcity and essential nature are often worth far more than gold.

Just like with a survey, the importance of water to an individual real estate transaction increases with larger and rural properties. 

In Colorado, all of the natural surface water (streams, rivers, ponds) belongs to the citizens of Colorado. If you have a pond on your property, you may or may not have a  water right to use that water, but you don't own the water itself. A water right is a prescribed and limited right to use - not ownership. This right is considered a  real property right. As such it:

· Is subject to the State statutes of Frauds and Limitations.

· Is subject to taxation, and may be mortgaged separately from the land, and will pass as real property under a will.

Water use in Colorado is allocated under a  doctrine of prior appropriation as set forth in the state constitution. This doctrine appropriates water rights on each flowing water system (stream, river, etc.) to senior users over junior users based on the date and intended beneficial use of the water as determined by a system of water courts.

Because it is stand-alone real property,  water rights do not automatically pass with title to the land. 

 

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Water Rights (continued)

Water is  not an appurtenance. If the parties intend to transfer a water right in a real estate transaction,  the right must be specifically mentioned in the deed (or separate deed). One of several logical exceptions to this principle is the law presumes that a domestic or household use well and water right do pass with title to a country house under the  principle of constructive annexation.

Water rights are appropriated (adjudicated) by the courts, and thereafter enforced by the State Engineer for tributary water. The 6 huge ground water basins that lie under Colorado are administered by the Colorado Ground Water Commission.

The State Engineer's office maintains records for all wells in Colorado. Each real estate transaction involving a well places a burden on the buyer to report the transfer of that well to the State Engineer's office. This is normally done at closing.

Each seller in a real estate transaction must also disclose the source of potable (drinkable) water to the buyer. This disclosure is built into (and was covered in) the Commission-approved Contract to Buy and Sell Real Estate, and Seller's Property Disclosure.

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Financing - Equity Skimming

Equity skimming is a felony offense in Colorado and a federal offense if an FHA or VA loan is involved. 

Here is a sample of how equity skimming would work:

A person purchases a property by assuming a loan or perhaps having the seller carry-back the financing. The goal is to purchase with little or no down payment. Then after closing, the investor makes one payment on the loan - causing the lender to "close the file," assuming that the loan is on track and out of mind. The investor continues to collect rents and absconds with the security deposits, leaving town long before any foreclosure is complete.

Purchasing a property with no money down is not illegal, and in fact is the common practice for many shrewd investors. But, it should at least raise a cautionary flag to the brokers involved with respect to the buyer's stability, financial history, etc.

 

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Financing - UCCC (State Usury Statute)

Almost every state has a usury statute that limits the interest rate that may be charged to individuals borrowing money within the state. In Colorado, the Uniform Consumer Credit Code (UCCC) protects the borrower.

The UCCC has provisions relating to disclosure and the borrower’s right of rescission similar to the Federal Regulation Z. 

UCCC usury provisions pertain to:

· Seller Financing:   If the seller is not a creditor and carries back some of the purchase price for the buyer, the maximum interest rate graduates. It runs from 21% for a loan of $3,000 or less to 45% for a loan amount over $3,000. If the seller has arranged prior to closing to sell the loan to a 3rd party, the maximum rate is 21% regardless of the loan amount.

· Supervised Lenders and Creditor Sellers:   Creditors are those who lend money more than 5 times in a year. They are limited to 21%. If the loan is a first mortgage for the acquisition or construction of the borrower’s personal residence, including mobile homes, the maximum interest rate is 45%.

· Broker Commissions:  If a broker takes a commission by way of a promissory note and deed of trust on the sale of a residence, the maximum interest rate allowable is 21% for $3,000 or less and 45% for more than $3,000. If the broker is a creditor, the maximum is 21% regardless of the amount financed. The UCCC also restricts any security interest that may be retained by the broker.

 

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UCCC (continued)

Other Provisions of the UCCC relevant to brokers:

Confession of judgment clauses in a  cognovit note (whereby the lender can obtain a speedy judgment against a defaulting borrower through an affidavit filed by an attorney, but without legal proceedings) are prohibited.

Right to refinance:  at the then prevailing interest rate is a borrower's right provided:

· The note is secured by a second or lower priority note.

· There is a provision for a balloon payment.

· The borrower qualifies under the lender's or creditor seller's normal credit standards.

The lender is still in the business of making loans at the time.

UCCC Financing Statements and Security Agreements 

If anyone, including a seller, finances part of a sale that includes personal property, these documents must be filed with the Colorado Secretary of State.

A  Security Agreement is the modern day version of a chattel mortgage. It places a lien on the personal property (inventory, furniture, fixtures) as security for funds loaned.

A  Financing Statement is filed to give constructive notice of debt. It discloses the address(es) of the borrower and the secured party (normally the lender/seller), a description of the property, and the maturity date of the obligation. It is signed by both parties.

 

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Financing - Standards of Mortgage Servicing

Mortgage servicing is the collection of payments and crediting same to the borrower's account. It usually involves all of the related bookkeeping, such as escrow analysis and management, payoff notices, etc. Servicing may or may not be done by the original lender. Many lenders contract out this function. 

C.R.S. 38-40-103 contains many restrictions on mortgage servicing providers.

· Within 20 days of transferring servicing or collection rights to another entity, the borrower must be provided with the new payment and address information.

· The borrower may continue to use the old payment information, and the servicing agent must forward any payments received until the borrower receives new payment information.

· Loan servicers must respond in writing within 20 days to any written request for loan information from the borrower, and must include the telephone number of the servicer.

· Servicers must provide an annual loan statement including the total amount of principal and interest paid in the preceding year.

· If the servicer fails to remit the taxes due from the escrow account in a timely manner, the servicer is responsible for any late fees or penalties imposed by the taxing authority.

 

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Financing - Loan Fraud

We've already covered equity skimming, which is a form of loan fraud. Here are a couple of others. Brokers need to be alert for signs of these occurrences. They are more prevalent than one might expect and responsible for much of the housing finance meltdown of 2007-2010.

False Appraisals:  This involves some combination of lenders, appraisers, buyers, sellers and/or real estate brokers conspiring to convince the loan funder to provide more money than a property is worth, or even more than is prudent.

False Buyer Qualifications:  If your buyer or lender indicates intent to misrepresent the amount of the buyer's income, savings, debts, or anything else, walk - no run - away from the deal - immediately after calling the Real Estate Commission enforcement section. This one can sometimes appear to be mildly innocent. Forgetting the illegality for a moment, a perfectly innocent buyer might look at this as helpful or a "good deal." The buyer cannot foresee that the feeling won't be the same when the inability to make the payments comes around - and statistics prove that it most certainly will.

Dual Contracts:  The seller and buyer write two separate contracts, one for the real terms of the transaction, and one for a higher price to be given to the lender to trick the lender into a higher loan (lower down payment).

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Landlord Tenant Act (C.R.S. 38-12-101 et seq.)

Property management is a specialty within the real estate business. Property managers represent owners who cannot or choose not to manage their own properties.

A property manager must hold a real estate license and is not the same job as an on-site manager for an apartment or office complex for which a licensing exemption exists in the license law.

The brokerage relationships between the owner and the manager are formalized by a document known as the  management agreement.

The broker's primary duties are normally marketing, maintenance, and financial management.

The  primary objectives of the manager are:

· To obtain the highest income stream for the owner.

· To protect the owner's capital investment while preserving a good owner-manager-tenant working relationship.

Under Colorado statute, landlords in Colorado and by extension, brokers acting for landlords under management agreements must follow the Colorado Landlord-Tenant Act.

 

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Landlord Tenant Act (continued)

Security deposits must be returned to the tenant within one month, unless specified longer in the lease - which can never exceed 60 days. Security deposit funds cannot be held back for normal wear and tear.

When the security deposit is returned, the landlord must furnish an accounting for any withheld amounts and the reason for the withholding (e.g. nonpayment of rent, damage to the property, etc.).

Failure to provide this accounting within the above time limits causes the landlord to forfeit any right to any part of the security deposit.

Willful unsupported retention of a security deposit also makes the landlord liable for triple the amount of the security deposit wrongfully withheld, plus court costs and attorney fees - provided the tenant gives the landlord 7 days advance notice of intent to file a lawsuit. In any such instance, the landlord carries the burden of proving that any withheld amount is not wrongful.

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Landlord Tenant Act (continued)

When a landlord changes property managers or otherwise divests of an interest in the property, the tenant must be notified of the name and address of the new security deposit holder. 

Gas Hazard: When a gas company serviceperson advises a tenant in writing of a hazardous condition in the provision of natural gas to a residence and the tenant in turn notifies the owner in writing, the owner has 72 hours (excluding Saturdays, Sundays, or legal holidays) to have the condition professionally repaired.

If not repaired within 72 hours, tenant may vacate and the lease is null and void and tenant is entitled to receive any applicable security deposit refund within 72 hours. If not done in this case, the tenant is entitled to receive twice the amount of the security deposit (not triple the amount wrongfully withheld) plus attorney fees.

Rent Control: This method of county or municipal regulation of the amount of rent that may be charged is illegal in Colorado. 

Domestic Violence or Abuse:  A landlord may  not, and a tenant  may terminate a lease when the tenant is a documented victim of domestic abuse or domestic violence. If the tenant provides such documentation and vacates the premises, then tenant is responsible for one month's rent after the vacation, payable within 90 days. The landlord may retain the security deposit until such payment is received.

Warrant of Habitability:  Colorado now has its first warranty of habitability. That is, the landlord is now considered to guarantee that any residential rental is fit for human habitation. There are two exceptions: It is  not a breach of this warrant if the condition was caused by the tenant, or if the cause was the result of domestic abuse or violence against the tenant.

If the warrant of habitability is breached, the tenant may vacate the premises after giving the landlord notice dated between 10 and 30 days after the breach, and giving the landlord 5 days to repair the condition. A landlord may not retaliate against a tenant for claiming such a breach of warranty of habitability.

Eviction:  A landlord may not remove or exclude a tenant from a dwelling unit without a court process unless the property is a meth lab, or there is reasonable evidence of vacation or abandonment.

These provisions do not apply to short term hotel-type rentals, assisted living properties and similar properties, AND occupancy of property under a contract of sale when the occupant is the seller or buyer. 

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Landlord Tenant Act (continued)

This concludes Chapter 10. Below is a brief summary which you can review before taking your quiz.

Foreclosure 

The first step is the lender  filing a notice of election and demand for sale with the public trustee.

The lender furnishes the original promissory note, original trust deed, a “combined notice” and a mailing list of persons who have an interest in the property.

The public trustee may require a money deposit (max $500).

The public trustee must  record the notice within 10 days of filing, and within 20 days mail the  combined notice.

The public trustee must  publish the notice once per week for 5 weeks.

A sale held without a  court order is invalid.

The owner has  no right to  redeem the property after the foreclosure sale.

When claimants have exercised their rights to redeem, the public trustee issues a  Confirmation Deed.

Liens and Encumbrances  

Property taxes for the previous year are an annual lien against property as of January 1 each year.

Real estate property taxes are imposed by taxing "entities" or "districts"  at county and local levels of government.

The federal government may impose a  federal tax lien.

County and local governments set a  mill levy (one thousandth of a dollar or .001). 

· Assessed Value x Mill Levy = Tax Liability (AV x M = T)

Last year's property tax may be paid without penalty according to one of two schedules at the taxpayer's choice.

· Pay the entire tax bill before April 30.

· Pay ½ on or before the last day of February, and the remaining balance in full by June 15.

Tax penalties at the rate of 1% per month begin to accrue the day after the due date.

The county treasurer  publishes a list in a newspaper of general circulation of the delinquent properties and the amounts owed on each.

The list must be published no later than 4 weeks before the  sale date, which is the second Monday in December each year.

At the tax sale, the highest bidder over the taxes due receives a  certificate of purchase.

A person  voluntarily  creates a lien by taking a mortgage secured by real estate. An  involuntary  lien is one placed against a property through a legal process adverse to the property owner.

A  statutory  lien is involuntarily imposed by law. An  equitable  lien is involuntary but imposed by court order.

A  general  lien is one placed against all property of a debtor, regardless of location. A  specific  lien is placed against a named single property item.

A  mechanic's lien is voluntary, specific, and equitable. 

Vendee's Lien: filed against a specific real property to secure return of moneys due to the purchaser after a seller defaults on a buy/sell contract.  Vendor's Lien: Secures a purchase money mortgage.

Colorado requires  errors and omissions insurance in order to hold an active real estate license.

Surveys and  ILC's are the most desirable method of determining accurate property boundaries. Surveys tend to grow in importance with the size and rural nature of the property. 

Water Rights 

A water right is a prescribed and limited right to use - not ownership. This right is considered a  real property right .

As such it:

· Is subject to the State statutes of Frauds and Limitations.

· Is subject to taxation, and may be mortgaged separately from the land, and will pass as real property under a will.

Water use in Colorado is allocated under a  doctrine of prior appropriation as set forth in the state constitution.

Water rights do not automatically pass with title to the land. 

Water is  not an appurtenance.

The right must be  specifically mentioned in the deed. 

Principle of constructive annexation.

Equity skimming is a felony offense in Colorado and a federal offense if an FHA or VA loan is involved. 

Uniform Consumer Credit Code (UCCC)

The UCCC protects the borrower. Its usury provisions pertain to:

· Seller Financing

· Supervised Lenders and Creditor Sellers

Broker Commissions

Confession of judgment clauses in a  cognovit note are prohibited.

Right to refinance - at the then prevailing interest rate is a borrower's right provided:

· The note is secured by a second or lower priority note.

· There is a provision for a balloon payment.

· The borrower qualifies under the lender's or creditor seller's normal credit standards.

A  Security Agreement  places a lien on the personal property as security for funds loaned. A   Financing Statement  is filed to give constructive notice of debt.

Mortgage servicing is the collection of payments and crediting same to the borrower's account.

· Usually involves all of the related bookkeeping.

· Servicing may or may not be done by the original lender.

· Many lenders contract out this function. 

Loan Fraud 

· False Appraisals

· False Buyer Qualifications

· Dual Contracts

Landlord Tenant Act 

A property manager must hold a real estate license. The primary objectives of the manager are:

· To obtain the highest income stream for the owner.

· To protect the owner's capital investment while preserving a good owner-manager-tenant working relationship.

Security deposits must be returned to the tenant within one month. Security deposit funds cannot be held back for normal wear and tear.

Failure to provide accounting within time limits causes the landlord to forfeit any right to any part of the security deposit.

When a landlord changes property managers, the tenant must be notified of the name and address of the new security deposit holder. 

· Gas Hazard: If not repaired within 72 hours, tenant may vacate and the lease is null and void.

· Rent Control: illegal in Colorado. 

· A landlord may  not, and a tenant  may terminate a lease when the tenant is a documented  victim of domestic abuse or domestic violence.

· A landlord may not retaliate against a tenant for claiming a breach of  warranty of habitability.

· Eviction: A landlord may not remove a tenant without a court process unless the property is a meth lab.

Click here if you would like to open this summary as a pdf, which you can then print or save to your device:  Chapter 10 Summary

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