What is Due Diligence in Real Estate?
You may have heard the term “due diligence” before, but what does it mean? This term refers to the reasonable exercise of care by parties involved in a transaction when buying or selling something and/or entering a contractual agreement. Due diligence is a legal term that means someone took reasonable steps to satisfy a legal requirement. It can also refer to an appraisal of a business being assessed by a prospective buyer so that the assets and liabilities are adequately evaluated before committing to purchase. Whether you are planning to buy or sell your home, learning about due diligence in real estate, and how it applies to you is imperative. Read on to gain more insight about this term and what it means during a real estate transaction.
What is due diligence in real estate?
When it comes to buying and selling residential real estate, the due diligence period that usually lasts between 10 and 15 days. During this time, the buyer has an opportunity to receive a full disclosure regarding the facts about a home, including the home’s condition. Since a home is an asset, buyers must be aware of its conditions before they agree to complete the transaction. This allows buyers to learn more about both the physical condition of a home and the financial facts regarding its value. It helps you make a well-informed decision about whether or not buying a specific home is in your best interest. Getting a home inspection before signing a contract is a good example of due diligence in real estate. When you schedule an inspection, it shows that you’re gathering factual information about the home’s condition before you determine whether or not it’s a good investment for you.
What happens during due diligence?
Several things take place during the due diligence period. Let’s take a closer look at how the due diligence process works in real estate.
Due diligence before an offer
Before making an offer, you should look carefully at the home you want to buy and research several factors about the neighborhood. This includes getting to know the neighborhood’s safety and crime statistics, its location in proximity to amenities, and its statistics regarding population growth or new developments. It’s also time to confirm whether or not there are any HOA (homeowner association) fees involved in buying the home and whether or not it’s part of an HOA. You should also confirm whether there are any CC&Rs, or covenants, conditions, and restrictions. Now is also a great time to investigate the local school system if you have children and any nearby medical facilities so that you’re confident you’ve chosen a neighborhood you’ll love. You can also ask your real estate agent for recent comparable sales so that you feel good about the deal you’re getting in terms of what you will pay for the home.
Due diligence after an offer
Once you make an offer on a home, it’s time to take some crucial steps to ensure you’re doing your due diligence and making a wise investment.
- Start by scheduling a professional home inspection so that you’re aware of any potential issues with the home’s roof, foundation, and other crucial systems. If the home inspection doesn’t go as planned, you have a right to rescind your offer or ask the seller to make repairs. You can also offer a lower price to “make up” for the cost of any repairs you’ll need to pay for out of pocket.
- You’ll also need to verify if the home is within a flood zone to confirm whether or not you’ll need to purchase additional flood insurance. If the home is deemed to be in a flood zone, it is highly advisable to pay extra for this insurance.
- If there is a well and/or septic system, those systems must also be inspected, and certificates of inspection must be provided to you and the lender before closing. If the systems have any issues, the seller must address them before closing.
- Your lender will schedule a home appraisal. This step is vital since it ensures that the home’s market value is in line with the price you’re going to pay. If the home doesn’t appraise for the appropriate value, you can either back out of the deal or have the seller lower the asking price.
What are seller disclosures?
As part of due diligence, sellers must disclose key facts and any known defects about the home they are selling in writing. This is done via a seller disclosure statement given to the buyer. Some examples of seller disclosures include if the property is in a flight line, noise pollution due to the home’s location near a highway, or if/when the property was treated for termites. It should also clearly list any possible encroachments from neighbors onto the property and if any home insurance claims were made in recent years since this could make the home more costly or difficult to insure. All of these disclosures can give buyers a clearer picture of the home and whether or not they deem it a good investment. Each state has its own disclosure laws, so make sure you look into your specific state’s legal requirements to ensure that you’re getting all of the information you need as required by law.
What are the rights of the homebuyer?
As a homebuyer, you have certain rights after making an offer, as long as these rights are exercised within the due diligence period. First, you have a right to ask the seller to fix any known issues after a home inspection. If the issues aren’t corrected, you may be able to cancel your offer/contract and get your earnest money refunded so you can look for another home. You should make any requests to the seller in writing as soon as possible so that you’re within the due diligence parameters. The purchase contract should be amended to include those new requests agreed upon between buyer and seller. They should also be listed as a condition of closing and escrow, and re-inspections may be required to confirm that the issues were addressed. Another option you have as a homebuyer is to make a counteroffer for a lower price. This will give you a lower total price on the home, so you can use the money to make the repairs or fix the issues yourself after closing. Always get everything in writing and never accept anything based on verbal agreement alone.
Due diligence is an essential part of the home buying/selling process. It’s imperative that you follow the steps outlined above and do your due diligence when acquiring your new property. This way, you’ll know exactly what you’re buying, and there should be no surprises after the fact.