Table of Contents
How to Complete Buyer Due Diligence
Importance of Due Diligence
Due Diligence Fees
How Long Does Due Diligence Take?
What Is Due Diligence Money in Real Estate?
Due Diligence vs Earnest Money
Due Diligence in Real Estate Bottom Line
How to Complete Buyer Due Diligence
- Analyze the Area
- Get a Home Inspection
- Environmental Assessment
- Check the Title and Financials
- Review the Seller's Disclosures
- Conduct a Final Walkthrough
1. Analyze the Area
Begin your due diligence by looking at the area and neighborhood to see if conditions are generally improving. What are the population and job growth statistics? Are property values going up or stagnating? Answers to these questions will tell you whether or not you're making a sound investment. This stage should ideally come before making an offer.
2. Get a Home Inspection
Next, you'll have to get a home inspection. A thorough inspection of the property to assess its structural integrity, systems (electrical, plumbing, HVAC), and overall condition. This can include specialized inspections for pests, mold, or environmental hazards. It's important to identify any necessary repairs or maintenance issues that need to be addressed, as they can influence the negotiation process or the decision to proceed with the purchase.
3. Environmental Assessment
Another part of the due diligence process is conducting environmental assessments to identify potential hazards such as soil contamination, asbestos, radon, or lead-based paint. Additionally, you should asses the property’s risk for natural disasters like floods, earthquakes, or hurricanes, which may impact insurance costs and future property value.
4. Check the Title and Financials
After that, you'll want to make sure there aren't any economic issues with the home. For instance, is the title clear of tax or mechanic leans? How much is a homeowner's insurance policy? Is there a homeowner's association, and do they have any essential rules or regulations? It's necessary to be aware of these potential issues before committing to the purchase.
5. Review the Seller's Disclosures
In addition to an inspection, the seller must submit a disclosure form stating any problems with the property. The inspection may also reveal these issues, but it's essential to pay attention to them if something slips by the inspector.
6. Conduct a Final Walkthrough
Before the end of the due diligence period, you'll want to conduct a final walkthrough, especially if any repairs needed to be made. This is the last chance you'll have to voice any concerns, so it's important to look at the property quickly and make sure everything is in order.
Importance of Due Diligence
- Risk Mitigation: Identifies and mitigates potential risks and liabilities associated with the property, preventing future financial or legal problems.
- Informed Decision-Making: Provides a comprehensive understanding of the property's condition and value, enabling buyers to make informed decisions.
- Negotiation Leverage: Empowers buyers with the information needed to negotiate better terms or request necessary repairs and concessions.
- Legal Compliance: Ensures that the property complies with all legal and regulatory requirements, avoiding future disputes or fines.
Due Diligence Fees
Due diligence fees refer to a sum of money the buyer offers the seller to take the property off the market. When a seller accepts a deposit, they agree to stop showing the property while the buyer does their due diligence. This practice is most common in North Carolina, but it may occur in other states and markets. Typically the due diligence fee is a few hundred dollars.
The due diligence fee is not required, but it may give the seller more incentive to accept the offer, especially in a competitive market. If the buyer agrees to go through with the sale, this fee will go toward the home's final purchase. But if they back out for any reason, the seller gets to keep the fee to compensate them for the time that the property was off the market. So, while due diligence fees can sweeten a deal, it can be risky if you decide you do not want to go through with the purchase.
How Long Does Due Diligence Take?
The due diligence period typically lasts between 7 and 30 days. If the buyer is unable to complete their due diligence during the initial agreed-upon time frame, they can speak with the seller to extend it. This period is the buyer's time to thoroughly inspect the property from all angles and ensure that they are confident in the purchase. So it's important to scrutinize everything and keep an eye out for any red flags while performing due diligence.
What Is Due Diligence Money in Real Estate?
Due diligence money or a due diligence fee, is a fee the buyer pays to the seller to maintain their exclusive right to purchase the home while they perform due diligence. This fee is most commonly associated with the North Carolina real estate market and is typically between $500 and $1,500. Although a seller might insist on a due diligence fee, it is not mandatory, and some states may even prohibit it. That being said, it is quite common in some markets, particularly in North Carolina, where many sellers expect it.
Due Diligence vs Earnest Money
It's also essential to understand the difference between due diligence fees and an earnest money deposit. While both are sums of money paid by the buyer to show the seller they are serious, there are a few key distinctions.
First of all, an earnest money deposit is customary, regardless of the state or market. Whereas due diligence fees are only common in certain areas.
Neither is mandatory, and the sum is negotiable. But most sellers expect an earnest money deposit to take the home off the market. At the same time, a due diligence fee may be a bonus but typically isn't expected.
Also, the seller won't refund a due diligence fee if you decide to back out of the sale. An earnest money deposit can be refunded, even if the buyer is the one who backs out, as long as it's within the appropriate time frame. Although, the buyer may need a legitimate reason, such as structural problems with the home.
Due Diligence in Real Estate Bottom Line
Due diligence in real estate is a vital step in the property purchasing process, providing buyers with a detailed understanding of the property's condition, legal status, and potential risks. By conducting thorough due diligence, buyers can make informed decisions, negotiate effectively, and protect their investment from unforeseen issues. Whether you are a first-time homebuyer or an experienced investor, due diligence is essential for a successful and secure real estate transaction.