My new website, “Coloradolandcontract.com” explains the ins and out of selling a property by contract for deed, also know as “Installment Land Contract” in the state of Colorado.
A contract for deed is the sale of a property for all intents and purposes, but the title (deed) remains in the seller’s name until the balance of the contract is paid off. The buyer has possession of the property and pays the seller principal and interest, plus pays for taxes and insurance on the home. This is very similar to a mortgage, except that the buyer does not have the deed in his name until he pays off the balance of the contract by refinancing or selling the property.
Colorado has had some problems in the past with sellers collecting taxes from the buyers and not paying them to the county. This will ultimately result in the property being losto the county or some tax lien buyer for a nominal amount of back taxes. So, the Colorado legislature attempted to remedy this by requiring three things on a contract for deed sale:
1. The contract must name the public trustee of the county where the property is located to be the escrow agent to collect taxes and pay them to the county treasurer each year.
2. The seller must file a “notice of transfer” form with the county treasurer, which alerts them that the county public trustee will be paying the taxes to them.
3. The seller must file a real property transfer declaration with the county assessor (standard form required for all property sales).
See, CRS 25-25-126.
Sounds good in theory, but what about in reality? The reality is a NIGHTMARE!
First, most county officials don’t know the law exists and don’t know what to do when they are contacted to set up the escrow. Second, even if they know what to do, the legislature didn’t address the most common contract for deed, which is a wrap of an underlying loan that ALREADY HAS A TAX ESCROW WITH THE LENDER! If the public trustee thus collected taxes from the buyer, it would be double payment.
So how do we deal with this? Simple, we comply with the law, then promptly ignore it. We file the notices, we name the public trustee as literally required by the statute, but then the buyer pays the seller monthly taxes and the seller pays it to his underlying lender, who then pays it to the county each year. The statute has a penalty for not filing the notices, but there’s no penalty for the buyer not paying the trustee (in fact, the law puts the burden on the BUYER to set this up, not the seller).
The penalty, however, for NOT filing the forms is brutal. The buyer has 7 years to cancel the contract and get ALL of his payments made under the contract back. I had the read the statute twice to believe it! But, having been to court on this issue more than once with a client who didn’t know about the filing requirement and did a closing on his own, let me share with you the REALITY of this law. In every case this actually happened, the Judge said, “You can cancel the contract, Mr. Buyer, but you don’t get to live there for free – I am going to let the seller counter claim for the reasonable rental value of the property for the time you’ve stayed there”. In every case, it was a wash – the buyer got his money back, but the Judge ordered the same money to be paid to the seller as rent for the time the buyer lived in the property. Thus, in reality, the draconian statute really has no big penalty in practice.
We’ve be doing it this way for 15 years – literally complying with the requirements of the statute and then ignoring it – and so far no problems.
If you’d like to do a land contract closing in Colorado, contact us at 303-398-7032.