Protecting Yourself From The Colorado Foreclosure Protection Act When Buying Subject-To In Colorado

Are foreclosures coming back?! If so, real estate investors may want to focus some energy on pre-foreclosures so they can swoop in and pick up killer deals before the foreclosure auction.  A pre-foreclosure is when a homeowner is headed towards foreclosure, but the house has not actually been foreclosed.  This is the stage in the process from the first payment default, all the way to the foreclosure auction.  In this stage, the house is still owned by the individual and not the bank, yet.  An old mentor of mine once told me to always eat the low hanging fruit.  Pre-foreclosures could once again be the low hanging fruit.

If you are going to focus your business on pre-foreclosures and you’re in Colorado, you should get yourself a great real estate attorney and become aware of the Colorado Foreclosure Protection Act (CFPA).   You can read the Act here.

What Is The Colorado Foreclosure Protection Act (CFPA)

Before I get into the meat of this, I need to say that this is not intended to be legal advice and I am not an attorney. This is just a summary of my understanding of the law.  My best advice to you is to consult with an attorney about your specific situation before buying any home that may have a delinquent mortgage.

CFPA is specifically directed at two groups; consultants and purchasers.   A consultant is someone who works with the homeowner for a fee but does not intend to purchase their home.  The purchaser, according to the Act, is anyone buying the property except a person who:

  • acquires such title as a result of a short sale transaction in which a short sale transaction
  • purchases the home as their primary home
  • is the current lien holder
  • acquires the property through a court order, statute, judgement, or by deed from the public trustee or a county sheriff as a result of a foreclosure sale
  • a spouse or relative of the person in foreclosure
  • any business regulated by the Government acting in their normal course of business

As you can see real estate investors buying for their own investment are pretty much the only option that is not excluded.  If you are buying for a profit, you fall into this! If you have any questions about whether you are subject to the CFPA check out this flowchart published by the Colorado Department of Regulatory Affairs.

How To Comply With The CFPA

Here is a partial list of what needs to be done to comply with the law (Consult your attorney before you do anything with this information because this list is only partial the Act is complex):

  • Of course, there needs to be a written contract and the best part is that the Colorado Real Estate Commission has approved a form to use!  Check it out here.
    • Make sure you take note of the following:
      • It must contain the name, address, and phone number of buyer.
      • Street address and legal description of the property
      • Total amount to be paid by the buyer.  This includes the amount of the loan that will be taken subject-to.
      • Date and time when the purchase will take possession.
      • There is also a very important Notice that needs to be included.  Make sure you include it.
  • As with the contract for purchase, the Colorado Real Estate Commission has approved a form for this, and it is attached to the approved contract above!  Best to use it all together but you can see it as a standalone document here.

You must provide a notice of cancellation form as a separate page of the contract and it must have a clear heading “Notice of Cancellation”.  As with the contract for purchase, the Colorado Real Estate Commission has approved a form for this. Check it out here.

This is just for subject-to purchases in Colorado.  There are other steps you must follow if you are purchasing short sales or just buying a home that is in foreclosure and you should consult an attorney beforehand.  There are also a lot more items that need to be done if you plan to leave the homeowner in the home.  I strongly urge you to help them find a new home and not allow them to stay.  You could easily open yourself up to lawsuits under the CFPA, especially if you give them the option to buy it back from you or give them any type of owner financing.

Subject-to Purchases Are Great For Building Your Real Estate Portfolio…but

The penalties for not following this law are fines up to $25,000 and up to one year in jail.  If you are serious about subject-to transactions (and you should be) than I would work on getting a solid contract together and have a competent attorney review it.  Again I am not an attorney and am in no way giving you legal advice.   The main point of this article is to make you aware of the seriousness of the CFPA and to encourage you to get appropriate legal advice.

Purchasing homes subject to the existing financing is a great way to build a large portfolio of cash flowing properties without needing to qualify for loans.  It could easily prove to be one of your most profitable strategies.

Interested in learning more about subject-to transactions in Colorado? Contact Pine Today!