Q: I really don't understand water law here in Colorado. Supposedly the house that I am buying comes with "water rights" but no one can tell me what that means.
A: There are a number of ways to own water in Colorado - direct flow rights, contract rights, or stock in a company that actually owns the water (usually a ditch company).
The traditional way to acquire water ownership is to divert water from a surface source and apply the water to a "beneficial use." Of course, many others want to do the same thing, so under the "Colorado Doctrine" the first to divert and use our state's "liquid gold" gets the right to use it again. Thereafter a pecking order is established so the next user gets to access the water, etc. going down the line until the water runs out. Anyone still in line loses out since there is no more water left to distribute.
The positions in line were judicially determined back in the late 1960's in order to generally eliminate disputes as to priority dates, diversion points, amount of water owned, type of use, etc.
These kinds of water rights can be bought and sold, but the Water Court in Greeley will determine how much water is still controlled. (Just because there is an adjudicated quantity that the owner has does not mean all of that water can be transferred. And if the water is moved, the court decides how much water must be left to protect the junior owners.) If part of it has not been used, the court also determines that the part not used has been abandoned and the owner loses the right to it.
So if the "water rights" involve surface water, the seller needs to show and transfer his or her rights in a judicial decree. But you also need to be certain that the amount of water listed in the decree has been properly used through the years. Otherwise, for the part that has been abandoned, you are paying money for nothing. A judicial proceeding in Greeley is necessary to determine how much water in the original decree is still available and transferable to you.
Water ownership can also be acquired indirectly through "contract rights," i.e. the contractual right to receive a certain amount of water from an entity such as the government or a quasi-governmental organization. The Northern Colorado Water Conservancy District (locally called the Big-T or NCWCD) is such an organization. The ownership documents technically are not called stock (which is the last entity form discussed in this column) but are called "units." These units may be bought and sold but not everyone is entitled to be a player. To own Big-T, a person must, among other requirements, own land within the district capable of receiving water from the District, have other water ownership to support the number of units owned, and demonstrate a need for the amount of water being acquired. NCWCD water is "supplemental" water and through the federal enabling statutes cannot be an independent source.
Finally, a person can actually buy stock in a ditch company which actually owns the water. But most ditch companies require that the water be used somewhere in its ditch system. If it cannot, then your stock can be voided, even if it has already been paid for by you. Some companies will not permit a buyer to transfer water rights to another ditch company. There are many other prohibitions depending on the company. The bottom line is that the by-laws and regulations of each ditch company must be studied to find out what is being purchased before you put your money down.
The foregoing is a very, very basic overview and omits ground water. But as you can see, water interests are not a very fluid (bad pun) investment and need to be studied so it is known what is being purchased and if a fair price is being paid.