The Importance of the Due Diligence Process

Due diligence should be thought of as a safety net for the buyer.  The due diligence period starts when the seller accepts and signs a written real estate contract.  In this article we will discuss the importance of having a due diligence period for the buyer.

The due diligence period usually lasts a week or two depending on the terms of the contract that is signed.  As soon as the contract is signed the clock is ticking and you must get all your ducks in a row before the period is over.

Home Inspection

One of my favorite shows I used to watch was “Holmes Inspection.”  The show about a home inspector, Mike Holmes, who came to the rescue of home-buyers who got ripped off.

All of these home-buyers either didn’t get a home inspection or the home inspector told them the house was fine.  To the surprise of the home-buyer, the house is a complete disaster.  It is falling apart and has major issues that weren’t done right.  At that point, Mike comes in with a fine tooth comb to find all the problems.  Then Mike’s crew comes in to fix everything wrong at no cost to the homeowner.

Like Mike, you should go through the house with a fine tooth comb being very careful not to miss anything.  Just like in the show, sometimes the seller will try to hide issues that will affect the homes value.  The seller might cover up termite or water damage with a sheet of drywall.  They might dress it all up and make it look pretty just to pass inspection.

That is why it is so important to find a good home inspector.  Your real estate agent might be able to suggest home inspectors that most of their clients use.  Make sure the inspector has a good track record.  Construction background is a plus.

Title Inspection

Title inspections are done by a Title Search Company or an attorney.  When the title inspection is done the buyer should purchase title insurance.  Title insurance is used to insure anything that may have been missed during the due diligence period.

Not all titles are “clean” and there is a chance that you could get a property with some baggage.  A lot of legal jargon is associated with a title inspection so I’ll try to keep it as simple as I can.

Other documented changes can get recorded onto the title that give other people certain rights to the property.  The most common of these documented title changes are as follows.

  • Covenants –  Legal Document that explains how the property may be used.
  • Easements –  Rights given to another party that allow them to use or cross the property.
  • Lien – A legal claim against a property made by a person or entity to secure the payment of a debt.

The most damaging of these title changes are liens.  Liens are placed on the title when prievious owners still owe money on debts like mortgages and contractor liens.

Review the Documents

During the due diligence period you there will be a lot of documents that you should review to make sure you know what your getting.  Here is a list of some examples of the documents you should double check before getting to the closing table.

  • Rental Status – If the property is a rental, review the current price that each unit is renting for and how many vacancies there are.  Check to make sure the tenants are paying what the seller says they are.
  • HOA Documents – The Home Owners Association may come into play differently in some areas so just be aware of what their terms are.
  • Seller’s Disclosures – More often than not, the seller is required by law to disclose any known defects about the property before selling.

Real estate is a major purchase.  It is nothing like buying a new pair of pants or anything else.  A lot goes into a real estate purchase that the buyer must know about.  Due Diligence is an import period that is given to the buyer so that they can fully understand what they are buying.  The main point you should take away from this article is to have everything verified so that you can get to the closing table.

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