Anyone who has bought real estate before knows that signing a contract to purchase a property is just the beginning. Once you have made an offer on a property and it’s been accepted, you have a few weeks’ time before you close the transaction. This is known as the due diligence period, which gives buyers the opportunity to evaluate the property and pick out potential problems. Even if a property seems perfect at first glance, there are potential issues that can grow into major problems if they aren’t addressed early on, so it is important to take full advantage of the time they are given.
What is Due Diligence?
In real estate, the due diligence period typically refers to the time after signing a contract when the buyer can inspect the property and decide if they want to move forward with the transaction. This gives you time to fully investigate the facts about the physical and financial condition of a property, along with the area the property is located in. The due diligence period is important, since while you usually get a chance to see the property before purchasing it, you likely won’t get an opportunity to inspect it thoroughly. While many states require homesellers disclose any information on a property’s known defects, with federal law stating that they must reveal cases of lead-based paints being used,1 it is often up to the buyer to inspect the many details that might impact their purchasing decision.
What Happens During the Due Diligence Period?
Every real estate contract will include a set amount of time for due diligence, with some states having a period of 10 days, while others have 15 days or more. In many cases, a buyer can ask for an extension of the due diligence period, but sellers generally don’t have a legal obligation to do so. This can lead to challenges, since a short due diligence period can put you in a situation where you don’t have enough to fully research the property that you’re investing in.
There are many parts of the due diligence process that you can do before making an offer on a property. This includes doing an analysis of the area and neighborhood the property is in, getting a Pro Forma financial statement, and reviewing your financial options.2 It is a good idea to get as much of the due diligence process done before signing a contract, as this reduces how much work you will need to do within the limited time you are given.
After your offer has been accepted, the more in-depth parts of the due diligence process can begin. You will need to conduct a full physical inspection of the property, covering general structural items like the roof and foundations, HVAC systems, and other potentially expensive problems.3 In addition, you should hire a specialist to conduct more specialized checks for biotoxins like asbestos, mold, and radon gas, as these hazards are typically not checked by home inspectors.4
There is more to do than just inspect the property though: you will need to ensure that a title company does a title search on the building, identifying any outstanding liens and other issues that could complicate the transfer.5 Your mortgage company will also conduct its own appraisal of the property to see if its market value matches up with the purchase price. There are also several other legal and financial matters to consider, from reviewing the lease for terms and unique agreements to checking HOA (homeowners association) restrictions to verify that the property can be rented.6
There are typically a lot of tasks involved in the due diligence process, so it is usually best to create a checklist of everything that needs to be done. This should include each action, the date for the action, and the party responsible for the activity. This way, you have a comprehensive record to fall back on if you need to
What Happens If There’s a Problem?
Something that’s important to keep in mind is that ALL properties are going to have flaws. Even a brand-new house will have things that are wrong with it. Oftentimes a property inspection will end with a long list of items found, most of which will be cosmetic, easily fixed, or the result of regular wear and tear. A seller is not obligated to fix every problem that an inspector finds, so keep your priorities in check.
If you come across something significant though, you should contact the seller and ask them to remedy the issue, whether by fixing it themselves or offering financial compensation. If the seller agrees to the requests that you make based on your due diligence, be sure that the purchase contract is amended to match.7 If they are unwilling to cooperate, you might want to walk away from the deal, though be aware that different states have different laws involving real estate due diligence. This includes circumstances where you are legally allowed to walk away from a purchase.8 Be sure you know ahead of time what you can and cannot walk away from.
The due diligence period can be complex, but by doing your homework, you can better position yourself to get the best possible value out of your real estate investments.
1. Nationwide. (n.d.). Due Diligence Period in Real Estate. Nationwide. https://www.nationwide.com/lc/resources/home/articles/real-estate-due-diligence-period.
2. Rohde, J. (2020, July 17). What is Due Diligence in Real Estate? A Simple Guide and Checklist. A Simple Guide and Checklist. https://learn.roofstock.com/blog/what-is-due-diligence-in-real-estate.
3. Rohde, J.
4. Gordon, L. K. (2019, July 30). What Is Real Estate Due Diligence? Find Out What to Do Before Buying a Home. Realtor.com. https://www.realtor.com/advice/buy/what-is-due-diligence/.
6. Rohde, J.
7. Rohde, J.
About the author
Isaac Isaiah Carr, JD MBA is founder, CEO, and business attorney of CCSK Law, a kingdom-driven law firm. Launched 5 years ago, CCSK Law grew from a single member firm to a 10 person team. His areas of focus include business formation and strategy, contract writing, sales, and corporate finance. Often referred to as an entrepreneur with a law degree, Isaac is able to offer business strategy utilizing creative solutions guided by legal and accounting principles that are then well executed in law. Experience in a variety of industries including real estate, hospitality, automotive, e-commerce, professional services, and healthcare. Successfully negotiated and closed multi-million-dollar transactions, ranging from $1.8M to $10M, with private investors, corporate leaders, and municipalities. Ultimately, he builds sustainable structures for systematic growth. Graduated from Valparaiso University Law School summa cum laude with his Juris Doctorate as well as the AACSB-accredited Valparaiso University School of Business with his Master’s in Business Administration. Passionate about education in all forms, Isaac is involved in the nonprofit organizations of SCORE, Neighbors’ Educational Opportunities (NEO) and New Vistas High School, ValpoNext, and Music Neighbors.