Due diligence in real estate is the time between accepting an offer and closing. Due diligence gives the buyer time to do an appraisal, title search, property inspections, and other things.
The period between the acceptance of an offer and the closing date is known as due diligence. During this period, the buyer and the seller will allow the buyer to inspect a property before closing. It ensures that you as the buyer are getting exactly what you paid for and that your lender will fund your purchase. Learn what happens during due diligence and why it pays to do your homework.
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What Happens during a Due Diligence period?
It pays to have all the necessary information to make an informed choice when buying a home. You’ll want every aspect of the deal to be thoroughly examined before you close the deal. You may be able to legally cancel the sale if you discover incorrect information. Before the due diligence period expires, review all the following.Home Inspection
Home inspections are a visual assessment of the mechanical and physical characteristics of a house. The inspection can reveal potential problems with the roof, walls, doors, windows and electrical systems. Hire a home inspector to ensure that the property is inspected thoroughly, even if you are not required by your lender. You may be able, if the inspection reveals any major problems, to withdraw your offer without penalty within a certain time frame if an inspection contingency is written into your contract. Consider negotiating repairs with the seller. Some sellers will make repairs or negotiate a deal to avoid losing the sale.Home Appraisal
Home appraisals are performed by third-party professionals who have the necessary credentials. They evaluate the market value of homes based on their physical attributes, similar properties in the neighborhood, the condition of the house, upgrades, and amenities. An appraisal’s primary purpose is to provide lenders with an estimate of the value of a house when they are underwriting mortgage loans. It also helps you determine if the price of the home is reasonable based on its appraisal. You have several options if the appraiser’s report is lower the price that you paid for the house.- Ask for another appraisal, particularly if there are errors or missing information in the report
- Renegotiate with the seller the price
- Paying more upfront will cover the difference between the price of your home and the amount you are approved for.
- You can cancel the contract if it contains an appraisal clause
Title Search
A property title search will reveal any hidden liens or lawsuits that may have been filed or pending on the property, which the seller was not aware of. A property title search will not only reveal who owns the real estate, but it can also make sure that all legal issues are addressed and disclosed prior to closing escrow. If you don’t discover any judgments or liens before closing, you may end up paying legal fees to clear the title.Land Survey
A land survey or maps the boundaries, features, corners, and improvements of a particular piece of land. It gives you an exact legal description as to where your property ends and the neighboring property starts. You could find yourself in a legal mess if you discover that the detached garage which helped seal the deal for your new house is actually encroaching onto your neighbor’s property. You may be able to negotiate the price with the seller if there are any issues to resolve before closing. If you believe you are buying a 3-acre property, but the survey shows that it is actually only 2.5 acres in size, you may be able to negotiate the price.Disclosures
In general, sellers are required to provide information about the property they sell in a document called a Disclosure Statement. Disclosure statements can be different depending on the federal, state, and local laws. Disclosure statements may include the following:- Roof leaks
- Renovations done without a permit
- Environmental hazards such as wildfires and floods
- Foundation, HVAC and appliances problems
- If there was or wasn’t a suspicious death at home
Homeowners association (HOA), Rules
Homeowners’ associations (or HOAs) are usually set up in order to enforce certain rules for homeowners within a particular area or neighborhood. These guidelines also aim to protect residents and ensure their safety. It’s important that you know the HOA’s expectations and its covenants before you purchase a house covered by one. For example, you should be aware of the HOA’s bylaws. There are usually HOA fees that you should be informed about by the seller, or the agent of the seller, before submitting an offer. The fees vary from one area to another, but according to Realtor.com, the average HOA fee for a single family home is between $200 and $300 per month.Zoning Rules
The zoning rules and ordinances describe the permitted uses of a property in a particular community. These rules can influence your decision to purchase a house. For example, if you are unable to build an addition because of local fauna or flora. The National Register of Historic Places places restrictions on the changes you can make to a home that is listed as historic. For example, you may be restricted from changing the exterior color or keeping the original doors and windows. It may not stop you from purchasing a house, but knowing what to expect during the due diligence phase will help you prepare.Insurance
By law, homeowners are not required by law to buy insurance. Most mortgage lenders do require insurance coverage to finance your purchase. The price and coverage of a policy can vary greatly depending on factors such as the age, location and condition. It’s important to know, for example, if your home is located in a flood-prone area, as this will require flood insurance. This is typically not covered by a standard policy. You should also know whether the house is vulnerable to a hurricane, earthquake or the condition of its roof. If the pool requires additional liability coverage you will need to purchase the right amount.How long is a due diligence period?
Buyers and sellers will usually agree to the time frame for due diligence when negotiating the contract terms. This time period can be quite variable. In certain areas of the U.S. you may have between seven and fourteen days to do your due diligence. Californians have on average 17 days to complete due diligence. Some agreements can be tailored if both you and the seller are willing to proceed at a slower pace or faster pace. Some agreements call for a much longer period to complete due diligence, depending on the complexity. If problems occur during due diligence, your real estate agent or brokerage should be able provide you with information about the options available to resolve them. You must notify the seller in writing of your satisfaction with the appraisal, title search, inspection results and other contingencies. This notification is required before the due diligence period expires. Escrow can then proceed.The Bottom Line
Due diligence is the period of time during which you, as the buyer, can ask questions, investigate and resolve problems to move forward with your purchase in confidence. When you are ready to close the deal and move forward, your credit score can be an important factor for lenders.Feel Free To Schedule A Consultation
Contact Bonardi & Uzdavinis without delay to arrange a FREE consultation.
