Due Diligence: Real Estate Guide

By PropertyClub Team
Jul 20th 2022
In real estate, due diligence refers to the buyer's obligation to ensure the property is in acceptable condition before the closing. After the buyer submits an offer, the due diligence period begins, allowing them to inspect the property and voice any concerns. In some markets, like North Carolina, there is a fee that the seller may request before the due diligence period. Here is a closer look at due diligence fees and what they entail.

Every buyer and lender will have their own process for conducting due diligence. The due diligence period typically lasts between 7 and 30 days but can be extended for as long as the buyer and seller agree. 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. 

hash-markHow to Complete Buyer Due Diligence

  • Analyze the Area
  • Get a Home Inspection
  • 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 an inspection. Have a trained professional inspect the essential aspects of the home, including the roof, foundation, HVAC and electrical systems, plumbing, and exteriors, and check for any pests or presence of lead paint.

3. 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.

4. 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. 

5. 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.

hash-markDue 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.  

hash-markReal Estate Due Diligence Period

The due diligence period refers to the time given to the buyer to inspect the property and perform other due diligence. In most cases, the due diligence period will last between 7 and 30 days, but the buyer and seller can agree to a shorter or longer time frame. 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. 

hash-markWhat 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. 

hash-markDue 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.

hash-markDue Diligence Real Estate: Bottom Line

Performing in-depth due diligence is an important part of purchasing a home that should be taken seriously by buyers. Although in some areas, this might mean paying a due diligence fee, it's well worth it as purchasing a home without proper due diligence is risky. The due diligence period is a common part of a real estate transaction as it gives buyers the chance to ensure they are comfortable with the deal, and won't be in for any unexpected surprises.