What is due diligence when buying a property? If you’re new to real estate investing or buying a home as a primary residence, today we’ll answer that question.
In short, due diligence is the period of time that occurs between when an offer is accepted offer and the closing day. It is when the buyer needs time to:
- Get an appraisal to ensure a fair price
- Get a title search, which will find any taxes, liens, judgments, and bankruptcies that are associated with the property
- Conduct property inspections that may include:
- Home inspection
- Radon gas inspection
- Termite inspection
- Well/septic inspection
- Any other inspection/property survey that’s relevant to buying real property
What Does Due Diligence Do?
Going through the due diligence process protects the buyer to ensure they are getting a good investment. The due diligence period is also crucial for mortgage lenders to determine whether they will approve the loan or if the property is too risky. Likewise, homeowners insurance companies assess their risk. Meanwhile, the title company runs a title report and ensures no defects or claims against its ownership.
It’s a common step in real estate transactions so buyers can legally back out of a transaction that turns out to be a bad deal. For example, if the home inspector notices termite or mold damage, the buyer can move forward with the purchase contract or back out without any penalties (if the contract says so).
While earnest money deposits protect sellers, the real estate due diligence period protects buyers. It’s a practice that ensures that first-time buyers, real estate investors, and anyone else buying real property can make an informed decision.
What If You Pay Cash?
If you decide to skip using a lender and pay cash upfront, you still have some time between ratification day and closing. Even if you don’t have a lender that may require a home inspection, you may still want to take a closer look at the property. You must still go through the title search and all formal avenues to legally buy the house, though.
The real estate agents at Marketplace Homes strongly advise that before you buy a property, at least check how its significant systems are running. HVAC systems are part of the typical home inspection, and a $400 check of the entire house can spot potential defects and other dangers such as asbestos, lead-based paint, termite damage, and more.
Though paying cash can get you out of loan origination fees and interest payments, “invisible” hazards like being in a flood zone (hack: check out FEMA’s flood map here) can blindside you. It’s also wise to check out the area’s crime rates and amenities to ensure that your investment is sound.
How Long Is The Due Diligence Period?
The due diligence period is typically 30 days long. Once all parties sign the real estate contract, the countdown starts to closing day. During this time, much of the burden is on the buyer to make sure that the house is good.
It’s vital to check the physical condition of the property so that you’re not stuck with a purchase you regret. This time frame is more than enough for you to acquire proper title insurance, conduct a series of inspections, find a suitable home insurance company, and investigate the property thoroughly.
Know What Is Due Diligence: A Vital Part of The Buying Process
Now that we know what due diligence means, you can buy a new home with more confidence. If you have any questions about investment terms or other real estate needs, our realtors will gladly answer your inquiries. We are ready to help you with investment acquisitions, dispositions, buying new construction homes, or simply finding the single-family home of your dreams.
Alicia Persson is the 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 Masters graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she is playing keyboard in a local 90’s band in central Virginia or spending time with her amazing family.