CREC Reminder: Seller financing in real estate Increases Risk


July 31, 2017

Real estate transactions involving seller financing are not common, but they happen with enough frequency that all licensed Colorado real estate brokers should have an understanding of their role and restrictions in such transactions.  Prior to 2014, the Colorado Contract to Buy and Sell Real Estate (Residential) (CBS1) contained sections in the contract that allowed the seller and buyer to outline specific financing terms if the seller agreed to provide a loan for the buyer.  

The revised 2014 version of the CBS1 still offered Seller Financing as an option to be selected, however all language discussing specific terms of the financing such as amortization rate and payment terms were eliminated.

Real Estate brokers still periodically contact the Division of Real Estate asking if they are permitted to broker transactions involving seller financing, and if so, how they can negotiate and document the financing terms if the ability to do so is no longer available in the purchase contract.

What is the role and requirements of the real estate broker with seller financing transactions?

Colorado Real Estate brokers can still broker a real estate transaction involving seller financing.  However, the role of the real estate broker is to assist the principles in the transaction in negotiating the sale and purchase of the property, not to assist the buyer or seller in obtaining or providing a loan.  Unless also licensed as a mortgage loan originator, Colorado real estate brokers are prohibited from taking a residential mortgage loan application or negotiating the terms or a residential mortgage loan, including a loan provided by the seller.  Real estate brokers are discouraged from assisting the seller or buyer with any of the negotiations or documentation of loan terms in a seller financed residential real estate transaction.  Instead, the seller and buyer should be encouraged to consult with an attorney or licensed mortgage loan originator to obtain expert advice in matters in which the real estate broker is not an expert. 

Real estate brokers are required by law to act with reasonable skill and care in their transactions. Additionally, if acting as an agent for the seller or buyer, brokers have the additional responsibility of promoting the interests of their client with the utmost good faith, loyalty, and fidelity.

If a broker were found to be engaging in acts that require a mortgage loan originator license, they would likely face discipline by the Colorado Real Estate Commission.  Additionally, a broker could also face discipline if, in a transaction they brokered, a seller was found to be in violation of state or federal laws regulating seller financed transactions because of instruction or advice provided by that broker.

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