Updated Colorado Inspection Objection - Inspection Resolution Forms

Updated Colorado Inspection Objection - Inspection Resolution Forms

After reviewing more information and discussions with lenders, brokers, and committee members, VanEd is updating our Inspection Process Discussion for our real estate students and affiliates. Here you can find an update on the new Colorado Inspection Notices discussion that began when the Colorado Real Estate Commission (CREC) updated the new forms. We will continue to monitor the discussion and update our members when appropriate.

The start of a new year brought with it changes to the real estate forms and contracts in Colorado. Among those changes are fairly drastic changes to the Inspection notice forms, including the removal of both the possible seller agreement with buyer requests for repairs, but also the seller's alternative resolution (counteroffer). Students have begun asking what they need to do to properly prepare the new Inspection Objection and Inspection Resolution forms. In this post we will go through this situation.

The Inspection Process

The inspection process is critical to the transaction. The buyer will generally perform or have an inspector perform the inspection. After reviewing the report the buyer will then inform the seller of any repairs or credits that the buyer is requesting. This is completed through the timely use of the Inspection Objection notice.

Prior to completing the Inspection Objection form the buyer will want to contact their lender or Mortgage Loan Originator (MLO) to ensure that the items being requested will not alter the terms of the financing that the buyer is seeking. The buyer should carefully consider any changes that may occur to their financing because of the resolution BEFORE submitting a notice to the seller. Once prepared, the buyer or buyer's broker will deliver the notice to the seller or seller's agent.

The seller now has the opportunity to review the requested repairs and determine what, if any, of these the seller is willing to take responsibility for completing. Once the seller makes a decision they will need to communicate that to the buyer or buyer's agent.

How Does the Seller Agree to the Terms of the Inspection Objection or Make a Counteroffer to the Buyer?

Here the Commission has left the brokers and consumers without direction, so let's take a look at the options.

  1. If they agree to repair the items requested by the buyer, the seller or seller's agent can deliver a signed Inspection Resolution form which is an amendment to the contract (a signed Amend/Extend form can also be used).
  2. If the seller is making a counteroffer they can still send signed Amend/Extend or Inspection Resolution forms to the buyer with the counteroffer included.
  3. The seller could instigate contact via phone, email or fax to negotiate final terms.
  4. The seller could mail a letter to the buyer (or buyer's agent). Obviously this is not the most timely idea.

The takeaway is that by submitting an Inspection Objection notice to the seller, the buyer has begun a new round of negotiations. The resulting agreement will need to be memorialized in the Inspection Resolution form which will function as an amendment to the Contract to Buy and Sell (CBS).

In preparing for this round of negotiations, consider that the first option is for the buyer to terminate the contract. This would be done using the Notice to Terminate, not the Inspection Objection form.

Other than Terminating the Contract, the Colorado Real Estate Commission suggests that there are generally five alternatives to address inspection issues. These are:

  1. Seller can repair the property prior to closing.
  2. Seller can agree to pay concessions or contributions at closing.
  3. Buyer can make repairs after closing without assistance from seller.
  4. Buyer and seller can reduce the sales price.
  5. Seller can escrow funds or pay a contractor at closing.

All of the above amend the Contract and must be memorialized on the Inspection Resolution or Amend/Extend (not both) and provided to the buyer’s lender.

An Example and an Option that Might Work

Our buyer wants repairs completed and the seller is willing to take care of these issues, but the total financial amount may affect the financing. The parties agree to Extend the Inspection Resolution deadline an additional week, allowing the seller to complete a series of repairs on the property. After the repairs are complete the buyer withdraws the Inspection Objection they originally submitted and the transaction moves forward to closing.

In this instance the buyer would not have anything to report to the lender and the financing would not be affected.

The CREC wants one point to be clear, and this is the primary reasoning for the change to these forms; Any resolution of the inspection will likely amend the contract and could impact the financing available to the buyer. The buyer needs to disclose the amendment to their Mortgage Loan Originator (MLO). This means that before submitting an Inspection Objection notice the buyer should consult their lender, and once the agreement between the parties is formalized in a final Inspection Resolution that is signed by all parties, a copy of that agreement should be submitted to the lender.

If negotiations take place via phone, eMail, fax, twitter, Facebook, FedEx or regular mail does not matter. Just like notes taken or copies of documents prepared during the initial contract negotiation process, the real estate broker should retain a copy and notes of the entire negotiation process in their files.

Written and Published by: VanEd


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