What is due diligence?
Purchasing a home or raw land comes with some risk — whether it’s a small home or huge farm. You’ve heard people say to make sure to “do your due diligence” when buying, but what does that actually mean?
The truth is, it doesn't have to be that stressful. It can be a time-consuming process, and you need to know what to do. So here is what it means and some of the steps you should consider and perform.
Do your Research
Due diligence means negotiating a period of time before you close on the property to do your research. You might also be asked to pay a certain amount of money for that time. You should use a reasonable amount of caution, review all documents, walk the property, procuring insurance, getting the property appraised. If there are too many issues with the property, meaning too much potential risk and cost, then you can cancel your purchase agreement and look for a better property or negotiate repairs and remedies. This must all be done prior to the expiration of your Due Diligence period or you will lose any earnest you might have been asked to pay (only your Due Diligence money is at risk during this time), your earnest money is protected during the Due Diligence period. You could lose your earnest money if you cancel or terminate your contract after the Due Diligence period is over.
- Make sure your mortgage is fair and in line with competitors. Shop around and consult with your Realtor to see if they have a list of lenders that they have experience with. During the DD time period make sure the lender has sent all your paperwork through the final underwriting process and the appraisal is in and in line with your contract price. You do not want the lender to notify you of any issues or changes after DD is over.
- You should have an inspection and it's a good idea to go to it? Review the inspectors remarks on all the work that needs to be done with both your Realtor and your inspector? Renovating properties is hugely expensive and high risk, so make sure you get estimates for the work before you decide to move forward with a purchase. With the help of your Realtor you can request and negotiate some or all of the repairs to be made prior to closing (this is another item that needs to be taken care of before the end of your DD time) The seller does not have to agree to make any repairs and can ask for a copy of the inspectors remarks.
- Make sure you check to see whether an insurance policy can be written for the property and home much it will cost. Some areas, such as fire-prone, hurricane-prone or flood-prone areas, might not even be able to get a policy. And even if they do, it might be expensive. Get some bids before you’re too far along in your purchasing process.
- Request and review (if applicable) any information about the communities home owners association (HOA) to avoid communities that are in disastrous shape, out of money or have significant construction issues? This is not a complicated task, your Realtor can get a copy of the HOA's Covenants and Restricts for your review. You don’t want to buy into a community that may impose rules or fees that you are not comfortable with. If you do, you will feel some discomfort as the years go by and you have to deal with the issues and special assessments that you will be required to pay.
- Have your attorney review the title and insurance policy. This will help you see if there are some issues that should concern you. Talk to the title insurance company and/or lawyer to help you review the documents. Also look at the plat of the property, have the easements plotted by title and walk the property for encumbrances.
Those are just a few of the many items that make up due diligence when buying real estate. Remember, you have to do these before you close on the property. If you fail to do the proper tasks, problems might arise that were preventable, and might make your real estate experience less than palatable, or downright life changing! Or they might cause you to lose all the money you’ve put into the property.