What is Due Diligence in Real Estate?
Due diligence is an integral part of the real estate process in which buyers and sellers ensure that they make an informed decision in their property purchase or sale. When done correctly, due diligence protects buyers and sellers from unwanted consequences like lawsuits, expensive repairs, and more.
Proper due diligence involves careful research, thorough home inspections, and accurate assessments. What else should you know about due diligence as it relates to real estate?
What happens during the due diligence period?
During the due diligence time, buyers must find out of there are any issues with the property. It’s valuable for everyone from first-time homebuyers to seasoned real estate investors. On the contract, there will be a limited time to hire a home inspector and other specialized inspectors. If these pros identify flaws, your realtor can address them and negotiate repairs or enable you to back out without penalties.
For example, if the house was built before 1978, there is a strong chance that it can have lead-based paint. Inspecting for hazards like this can help a buyer negotiate repairs or a reduction in the purchase price. During this time, the title company also does a title search to find any liens or debts associated with the property. Buyers can also learn if there are any issues with zoning, covenants, and potential barriers to getting homeowner’s insurance.
Sellers also need to ensure that the house is clear to close without legal issues. They must order resale documents if the home is in a homeowner’s association and make it available for inspection. Needless to say, a seller’s due diligence checklist is shorter than the buyer’s. Much of the burden is on the buyer and the buyer’s agent.
Why do buyers need due diligence?
Buyers obtain essential data from inspections done during the due diligence period. With this information, you can request that the seller fix problems before closing, or you can walk away from the deal without losing your earnest money deposit in escrow.
You can also test basements for radon gas, check for termites, defective drywall, and the status of the home’s well and septic system. These property inspections protect buyers against buying a money pit. They can also discover other risks, like whether the house is in a flood zone.
Why do sellers need due diligence?
In this period of time, sellers must do two main things. First, they must honor the real estate contract and ensure the buyer’s inspectors can access the property. Secondly, the seller must verify that all records related to their property are accurate and up-to-date.
This helps them avoid any obstacles to closing. If applicable, they must prepare all legally required disclosures like homeowner’s association (HOA) documentation and anything else needed to transfer ownership to the buyer legally. This stage protects sellers against lawsuits for not disclosing information before the sale.
How long does this stage last?
Since the due diligence period begins when the contract is ratified and ends on the contracted closing date, it can last between 14 and 60 days. If the transaction depends on financing, it will last longer than a cash deal that doesn’t need to wait for a lender’s approval. The typical purchase contract for a residential home can be around 30 days, while a commercial real estate contract may have a longer due diligence period.
Why do buyers need due diligence when they already have a real estate agent?
A buyer’s agent can be a great advocate in negotiations, but they need to know the house’s flaws or potential pitfalls first. Due diligence inspections give your realtor the information they need to speak up for you and work out the repairs and contract terms. Checking the house is invaluable for real estate investors, first-time homebuyers, and anyone who wants to walk into a situation with full awareness of what they’re buying.
Can you skip this step?
Yes, it’s possible to waive inspections and buy your house as-is or not to be thorough about the house’s title and liens. But skipping this process for your new home can result in potential legal and financial trouble, including:
- Major, costly flaws with the house
- Title defects
- Environmental hazards
- Inaccurate financial data
Moreover, if the buyer doesn’t conduct inspections within the limited due diligence period, they can lose the property altogether.
Due Diligence in Real Estate
Due diligence is an essential part of every real estate transaction. It protects all parties from unwanted consequences related to not checking the property physically and clerically. Sellers can have peace of mind that the property is sold without any legal risks, while buyers can make informed decisions about their home purchase. To have optimal guidance during the due diligence period and throughout the home buying and selling process, work with a Marketplace Homes real estate agent!
Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.