What is the due diligence period in real estate?
Signing a contract to purchase a home is just the beginning. Homebuyers must then navigate the due diligence period, which allows them to inspect the property and review important information before closing on the sale. The due diligence period can be complex and requires careful attention. Here, we outline what’s involved in the process, and offer some tips to help you smoothly sail through the due diligence period in real estate.
Know the law
Laws involving real estate due diligence vary from state to state. Your real estate agent should be able to provide specific information about which legal issues pertain to you, and what your options are if problems arise. All this should be spelled out in your purchase contract, so ask questions if anything isn’t clear.
Be sure you know what circumstances allow you to walk away from a purchase—such as a home inspection that uncovers a significant problem that the seller is unwilling to address, or the buying party is unable to obtain financing for a mortgage.
Also, discuss the implications of what you agree to in the contract. For example, in white-hot property markets, buyers may be tempted to negotiate shorter time frames before closing or even waive the right to conduct a home inspection. Both strategies may help your offer rise to the top among multiple bids but can lead to big headaches after the sale is completed.
Know what’s disclosed
Under federal law, sellers in all states are required to disclose any information about lead-based paints in their home. In some states, additional disclosures about known issues - for example, the terms of condominium covenants or the presence of asbestos insulation - are required to be provided to the new homeowner.
Home inspections
Typically, buyers have the right to inspect the property during the due diligence period. Professional home inspectors can assess the overall condition of the house and its most important components, including roof, plumbing, electrical, appliances, and heating and air conditioning. Home inspections can help identify the presence of termites, lead, radon gas, defective drywall, and other hazards.
In most cases, the buyer and seller will have to come to an agreement on who will repair or pay for any issues that surface during home inspections. While the seller may not be obligated to pay for repairs, the buyer may have the right to cancel the contract if agreement can’t be reached.
Appraisals
Before closing, your mortgage company will conduct its own appraisal of the property to ensure that the market value of the house is in line with the purchase price. If the amounts differ significantly, the seller may have to agree to lower the price or have another appraisal done to prevent the bank from declining to finance the house.
Homeowners association
Many condominiums, townhouses and some single-family homes fall under the binding rules and covenants of a homeowners association (HOA). These covenants may require specific upkeep, limit what you can do with the home or property, or impose mandatory membership costs or maintenance fees.
HOA rules and covenants are provided for review by the seller during the due diligence process; you may be able to cancel the contract if you find something not to your liking in these documents.
Title and survey
As part of the closing process, a title company will conduct a title search on your house, identifying outstanding liens and other issues that could complicate the transfer. In similar fashion, a survey will typically be conducted to ensure that property lines are clearly defined. Your lender may require any issues to be corrected before financing the purchase of your home.
Insurance during the due diligence period
You can also use this time to be sure you have adequate protection for your new home and its contents. Learn about Nationwide’s homeowners insurance and other ways to protect your home and family.