What Is Due Diligence in Real Estate?

Posted by Florida Realty Marketplace on Friday, December 24th, 2021 at 8:00am

What Is Due Diligence in Real Estate

If you’ve ever heard the phrase caveat emptor, or “buyer beware,” you may wonder how that applies to the process of buying a home. One potential risk of buying real estate is that in addition to the property, you are buying unseen problems. Due diligence is a process that is designed to protect the buyer, as well as the seller, from this scenario. As you look at homes for sale in Winter Haven, FL, it is important to understand what the process of due diligence looks like and why it is so crucial.

Defining Due Diligence

In short, due diligence refers to investigating facts about the condition of the property, both financial and physical, as well as the area the property is located in. You can think of this like doing your homework on a property before you make an offer and before you finalize a contract.

The goal of this is to make sure that you are getting a good deal on the property and that you can verify facts about the house that were presented to you.

The Process of Due Diligence

In most residential real estate deals, the due diligence period is outlined as a part of the initial contract. Some states will require certain time periods, often 10 or 15 days, for this to occur. The contract will also specify when this begins- sometimes as soon as the contract is executed between the buyer and seller, you are considered to be in due diligence, while other times, it may not begin until escrow is opened.

Part of the contract negotiations can include the due diligence period if either the buyer or the seller wants something different than the boilerplate options.

As a buyer, you want to be sure the due diligence period is long enough to fully research the property and complete any steps you’d like to take. It’s always better to negotiate more time upfront, as if you ask to extend and the seller refuses, you could lose any earnest money deposits if you do not complete the deal.

Pre-Offer Due Diligence

Before you even submit an offer, there is some due diligence you can pursue to ensure your offer matches what you are truly willing to pay. Some things you can include in this process may be:

  • An analysis of the area and the neighborhood
  • Pro Forma financial statements on the property
  • A review of your financing options

Post-Offer Due Diligence

Once your offer is accepted, you will be on a timeline to pursue more formal due diligence. This will include physical inspections, including a general home inspection and potential inspections of other systems in the home. You may also need to have special physical checks done depending on where the home is zoned.

Financial due diligence will be performed on the contract, the home’s history, as well as the finances of the buyer, to be sure that the sale is possible. Any legal or loan issues will also be worked out during this time, including HOA applications and insurance quotes.

Seller and Buyer Rights and Obligations

The seller of a home has a legal obligation to disclose certain material facts and known defects within the property in writing, typically through a seller disclosure statement. If the seller is an investor, they may have a property manager who provides this information. Examples of disclosures may include noise pollution from a nearby road, if and when the property was treated last for termites, or a tree that encroaches on the neighbor’s property. They will also need to disclose any recent insurance claims.

For the potential buyer, there is the right to bring any issues that are found during this process to the seller and ask them to either remedy the issue, account for it in the price, or cancel the contract with earnest money refunded. It is important to get any agreement made in writing.

As a part of the process of buying a home, your real estate agent should be able to walk you through these steps and help you gather the necessary information. They will provide contacts for inspectors and lenders, as well as share the information they have about local communities in order to help you make the best decision possible.

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