What Is Due Diligence in Real Estate?

Scope and Benefits

Whether a buyer is considering a residential or commercial real estate transaction, due diligence is necessary to protect their future. This research covers many factors that influence a real estate transaction. 

First, you want an accurate property valuation to ensure you are getting your money’s worth. Are there relevant zoning restrictions or property concerns surrounding its intended use? The seller may be able to answer these questions. You should also do your due diligence to ensure no massive defects, like mold. 

Every buyer should research the legal aspects of the home-buying process to complete each transaction step according to the law. Your research should also include the neighborhood value, potential environmental issues, financing, and legal records of the property. You can ask the seller these questions but always do your research instead of relying on the seller. 

Key Components of Due Diligence

A buyer should know all facets of the property before agreeing to purchase it or signing a contract. To make an informed decision, you should have a thorough due diligence checklist. Here are some key components of the due diligence period that will ensure you are making a smart investment. 

Property Inspection

You need to inspect the property to find potential issues with the home. However, hiring a professional inspector is better than relying on your knowledge. A home inspection will look at all aspects of the property, including the structure, foundation, systems, and appliances. If there are repair needs or immediate concerns, the inspector will include them in the report. 

You can use these findings to negotiate with the seller for concessions or repairs before the purchase is finalized. The seller may agree to pay closing fees in exchange for you completing repairs. If you fail to inspect the property before the purchase as part of your due diligence, you could face a significant repair expense shortly after acquiring the property. 

Title Search and Examination

A home’s title states all parties that may have a claim on the property. This may include the previous owner, mortgage lenders, and other parties. Conducting a title search to verify ownership and identify liens, encumbrances, or easements is essential to ensure you will become the rightful owner with no legal issues. 

If you skip this step during due diligence, you may face legal trouble when transferring home ownership. You run the risk of fighting for your earnest money deposit back, losing money on fees already paid, and wasting time on a transaction you can’t complete. 

Appraisal

Another aspect of the due diligence period is the professional appraisal. This step involves an experienced assessor who can determine the fair market value of a home based on numerous factors. This step ensures the buyer pays the seller a fair amount and doesn’t sign a contract only to discover a home in poor repair. 

If the appraisal determines the home’s value is far less than the agreed-upon purchase price, the transaction could be a terrible investment. If the appraisal findings are concerning, your lender may force a renegotiation or new terms. 

Environmental Reports

Many prospective buyers overlook researching a property’s environmental aspects. Are there potential hazards that could be dangerous to future occupants? Will these issues be resolved through significant repair costs shortly after moving in? During due diligence, an environmental report should be conducted to check for lead paint, mold infestations, aging pipe materials, or other concerns that could impact your investment. 

Surveys and Zoning

The boundaries of a property and its intended use can cause some tension if you do not verify them. A survey of the property will specify its borders and zoning compliance. Properties located within specific areas must adhere to the zoning restrictions of that district, so it is best to do your due diligence upfront to ensure your intended use for the property will be legal. 

Financial Review

A property’s financial health is another essential component that should be researched during due diligence. You can request property tax records, utility bills, and other financial documents to determine how much it costs to own the home. If you skip this step, you could be surprised by increased taxes or high monthly costs if the house has inefficient systems. 

Due Diligence for Different Types of Properties

The due diligence stage looks different depending on the type of property you are buying. For example, a commercial real estate transaction differs from a residential purchase, so most buyers should approach their research with this in mind. Here are some considerations for due diligence depending on your investment goals. 

Residential Properties

Residential properties are designed to be lived in. Whether you are purchasing a single-family home, condo, or townhouse, your due diligence should consider this. During the due diligence period, your focus should be on the property’s livability and potential rental income. 

Remember, sellers must make certain disclosures, such as if they know something is wrong with the property. If the seller agrees to the transaction and later finds out the buyer knowingly withheld information, they can back out of the deal. Always ask the buyer questions before closing the deal, such as if there were natural disasters in a certain time frame, that would mean the property likely has mold. 

Commercial Properties

Due diligence for commercial real estate involves other factors. Lease agreements, tenant history, zoning restrictions, and environmental assessments may play a bigger role in a commercial real estate purchase than a residential one. For example, potential buyers must make sure a commercial property is in ADA compliance. 

You can also research previous tenants of the property to see what kinds of future clients may be suited to the units in the building. It is wise to request financial documents from the previous owner during the due diligence process to assess the debts and income for the property in recent years. 

Land and Vacant Lots

You must research numerous elements to invest wisely in purchasing raw land or a vacant lot. For raw land, your main concerns should be environmental surveys and zoning laws. Purchasing a vacant lot with an aging structure could present several development restrictions and environmental concerns, such as lead pipes or rotting building materials. 

The Role of Professionals in Due Diligence

The good news about the due diligence period in real estate transactions is that many professionals can help. It is better to get the perspective of experienced professionals in the industry. Here are some professionals who can help you perform your due diligence before purchasing residential or commercial real estate. 

Real Estate Agents

The buyer and seller in a transaction may hire real estate agents. Realtors are essential in facilitating sales by providing information, coordinating inspections, scheduling property visits, and marketing properties. A real estate agent is ideal for asking questions about a specific property and how to find some of the information you require for due diligence. 

Home Inspectors

Since you should strive to purchase a property in good condition, a home inspector is crucial in every real estate purchase. The inspector’s job is to conduct a thorough review of every property detail to look for flaws. This allows the buyer to make an informed decision about the home. 

The inspector will examine the structure, electrical, plumbing, HVAC, windows, doors, yard, crawl spaces, and more to disclose potential repair concerns. This is an essential step in the due diligence process. If the buyer decides they don’t want the property, they can keep their earnest money deposit. There’s also room to negotiate a lower purchase price.

Title Companies

Title companies are responsible for conducting title searches and issuing title insurance. This protects both the buyer and seller during the transaction. If there are lienholders, encumbrances, or easements on the title, the company will identify them so a resolution can be found. 

Attorneys

Prospective buyers should always consider hiring a real estate attorney during a purchase. This lawyer will review all legal documents and review contracts to ensure all parties are meeting their obligations. 

Your real estate attorney will also read the fine print on all documents to protect you from unfavorable terms or conditions. They find that the property is part of homeowners associations, the owners owe the federal government back taxes, and can help with escrow. Their explanations will be critical when trying to understand the logistical details.

Simplified Due Diligence Process with a Cash Home Buyer

Due diligence is important when buying or selling a house to meet compliance obligations. As a seller, due diligence can help you secure an earnest money deposit from a buyer, but this process can be lengthy and frustrating when dealing with flaky buyers. 

The due diligence stage is much simpler when you sell your house to a cash buyer like A-List Properties. Our team will conduct our assessments and inspections of the property, so you won’t have to. You won’t have to worry about someone backing out of a contract or being stuck with unnecessary fees. 

We also keep funds on hand to pay cash for homes in any condition, so you don’t have to invest in repairs, cleaning the house, or risk facing delays from buyer financing. Instead, it’s as easy as making a phone call or email. 

If you want a free cash offer for your house, contact us today at 972-526-7042 or complete the online form.