Due diligence in real estate: what is it?

If you are buying a home for the first time, the first thing you need to do is contact a great real estate agent. Once you do, you may hear them say something like this: “We may need to consider reducing your due diligence period or removing it entirely.” So what is this “due diligence period” they are talking about? Why is due diligence one of the most important conditions for a housing offer? Why do sellers like it when you give up due diligence, and when it’s safe to do so?

What is a house offer due diligence?

Due diligence is most easily identified in the context of closure. closure This is a large window of time – usually around 30 days – between the seller accepting your offer and how you actually buy the house. due diligence is a shorter amount of time (usually 10 to 15 days) at the start of closing, during which you, the buyer, can still opt out of the offer of the home without penalty. As the name suggests, the purpose of the due diligence period is to give the buyer extra time to inspect the property, explore the area, etc. Essentially, due diligence is a 14-day home return window (even though you haven’t technically bought it yet). ).

Who determines the due diligence period?

The buyer (in this case, you) determines what your own due diligence period will be. It becomes a position in your offer and will be one of the first things the seller pays attention to. If they see that you have a zero due diligence period, they will react as follows:

(More on why zero due diligence is like home seller catnip in a minute.)

What are the things you should be doing during the due diligence period?

Your REALTOR® can guide you through an effective and efficient due diligence period, but for reference, here is a quick checklist of what you need to do:

1. Inspection – During a home inspection (~$300-400, buyer pays), the inspector analyzes the home on site and produces a report like this to show what may need repairs (HVAC, plumbing, etc.) and other issues (cracked foundation, pests, etc.).
2. Grade – During the appraisal, an independent third-party appraiser comes in and determines the fair market value (FMV) of the home. The FMV lets your mortgage lender know how much they can safely lend to you as they use the home as collateral for the loan.
3. Repair cost – You’ll want to have your home inspected as soon as possible so you can start factoring the cost of repairs into your final buying decision.
4. Reading Seller Disclosure − Sellers are required by law to provide you with a document that lists known problems with the home (leaks, cracks, liens on the home, etc.). You can find a blank seller disclosure for your state here, courtesy of eForms. Seller disclosure is very helpful because if the seller doesn’t disclose a serious problem, you can use that as leverage to negotiate a lower price, refuse, or even sue them if you discover a problem later.
5. Financial expertise – Due diligence is also a great time to assess property taxes, get home insurance quotes, and see how much you can charge for rent (if your HOA allows renters at all).
6. Reading the materials of the HOA – If the home is part of a homeowners association, the real estate agent will email you a HOA disclosure at the time of the DD. Here you can read about dues, statutes, rental rules, etc.
7. Spending time in the neighborhood Finally, one of the more relaxing and enjoyable aspects of due diligence is simply relaxing in the area. Go for a walk, stop by a local restaurant, and spend a few hours thinking, “Can I imagine myself living happily here?”

My wife and I actually broke the contract because, as much as we loved this property, the surrounding area was a wreck: no sidewalks, dangerous drivers, and not a single Aldi in sight for miles. Luckily, we have included due diligence in our offerings so that we can post a deposit without penalty. But what if we didn’t?

What happens if you opt out after the due diligence period expires?

You are not necessarily committed to buying a home if you opt out after the due diligence period expires. However, you lose your deposit. Deposit is a large pile of cash—usually 1% to 3% of the offer price—that you deposit into an escrow account shortly after the seller accepts your offer.

• If you end up buying a house, a deposit is applied to your down payment.
• If you refuse during due diligence, you will receive your deposit back.
• If you cancel after due diligence, the seller will keep your deposit.

The deposit exists to show your commitment to the seller. It also helps you by preventing other buyers willy-nilly from making offers just to take houses off the market. Finally, the deposit is important to sellers because it partially offsets the costs and headaches associated with re-listing a home for sale. “When you relist a home, its days on the market (DOM) increase and buyers may see that it has been relisted, which raises questions and may ultimately affect the next listing,” writes Joseph Elkuri, REALTOR® and founder of The Axis Group. By this point, sellers’ disdain for due diligence may start to make sense – so let’s dive into the details.

Why do sellers love offers with zero due diligence?

When you submit an offer without any contingency, you’re telling the seller, “Either we buy the house, or you keep our deposit.” Sellers love this because it shows commitment and is much less likely to save you, causing them to re-list the house.

At the end of 2021, my wife and I even asked some listing agents to tell us bluntly, “We are not considering proposals that include due diligence contingencies.” This included the house where we are now.

And to be clear, these salespeople weren’t greedy; they were actually doing us a favor by telling us what it takes to win. So, when is it safe to forego due diligence?

When is it safe to remove due diligence from your home offering?

When you waive due diligence, you forfeit the right to walk away with your deposit. From now on, you either buy the house or leave 1% on the table. For this reason, resetting due diligence is akin to gambling; You bet your earnest money ($2,500-$10,000) that you won’t find anything serious in the house. Yep, scary. So, in a seller’s market where zero due diligence is helpful and sometimes necessary, how can you reduce the risk of being stuck with a “shit van” (as my REALTOR® so lovingly calls them)?

• See as much as possible during the tours – If you’re serious about your home, make as many seller-approved visits as possible (tours, open houses, etc.) and ask your REALTOR® or contractor friend to help you check for red flags: cracks, leaks, mold. , etc.
• Buy new homes from reliable developers – If this is within your budget for a home, consider that a home built within the last five years will require fewer major repairs than an older home. Just be sure to check with your REALTOR® which builders to trust; some have been known to literally cut corners and save on materials.
• Keep your makings low – Don’t spend too much of your household budget on real money – maintaining the standard 1% should be enough to keep sellers happy.

Summary

Due diligence is a time window at the start of closing during which the home buyer can opt out and keep their deposit. This makes this a pretty stressful time for sellers, which is why they love to see you reduce—or better yet, remove—due diligence from your offer. Do you want to create the most attractive offer? One that will make salespeople salivate? Try the “three zero” sentence. Featured Image: Sasun Bugdaryan/Shutterstock.com

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