What is Due Diligence in Real Estate? (2024)

Check For Potential Issues When Buying Your First House

Do you understand what’s needed for due diligence in real estate to be completed?

If you are a first-time homebuyer, you are probably doing all the research to ensure you don’t make any mistakes. Performing due diligence increases the odds that you won’t regret purchasing.

The homework you are doing now is essential because a lot goes into buying a home—which means you have a lot to learn in a relatively short time.

The due diligence period in real estate becomes paramount to take advantage of.

The home could be yours once you sign the paperwork and hand over the earnest money deposit. But what if there are problems you only notice afterward?

Well, in most cases, you are stuck with what you’ve got after the end of the due diligence period.

While it is possible to return an item and file a lawsuit, it is expensive, time-consuming, and rarely worth the trouble unless you have a rock-solid legal reason.

For most buyers, there is no rewind button.

From experience as a real estate agent for the last thirty-eight years, I know that audits and reviews are crucial for a home buyer.

What is Due Diligence For Real Estate?

Due diligence in real estate is the thorough investigation of a home on a physical and financial level. Proper diligence also involves research about the area where the house is located.

Being diligent doesn’t mean a half-hearted look but carefully planned research on the property.

Home buyers can research during a window known as the due diligence period, which we’ll discuss shortly.

What is The Diligence Period?

During the real estate due diligence period, a buyer can research a property to feel comfortable about the purchase.

The time allowed varies between 7 and 14 days, depending on where in the US you’re purchasing. This time frame is based on standard real estate customs.

Now, you should research everything you can about the house’s history. During this timeframe, your job will be to uncover any defects or other imperfections that may cause you to reconsider the purchase decision.

You’ll want to be as thorough as possible during the assessment, as there are no second chances. You can extend the time if you find something that needs further investigation.

Essential Facts and Factors

1. Due diligence is a thorough and systematic investigation, evaluation, and verification process that potential buyers or investors conduct before entering into a real estate transaction.
2. It involves examining various aspects of a property, such as legal documents, financial records, physical condition, and market analysis, to gather information required for making an informed decision.
3. The due diligence period typically varies depending on the complexity of the transaction but commonly ranges from 10 to 30 days.
4. Common areas of focus during examination include title searches, environmental assessments, structural inspections, zoning compliance, and lease agreements.
5. Buyers often hire professionals like lawyers, appraisers, engineers, and surveyors to conduct investigations.
6. Financial assessment involves reviewing the property’s income and expense statements, profit projections, rental contracts, and other financial documents to assess its profitability and potential risks.
7. Legal verification aims to identify any legal issues associated with the property, such as liens, easem*nts, litigation history, or encroachments that may affect its ownership or use.
8. Physical diligence entails assessing the property’s overall condition by inspecting its structures, systems (electrical, plumbing), and amenities and identifying maintenance or repair needs.
9. Environmental investigation evaluates the property’s environmental impact by studying potential soil contamination, hazardous materials, or water pollution risks.
10. Proper review helps buyers mitigate risks associated with real estate investing and make more informed decisions about purchasing or investing in properties.

A Buyer’s Agent Should Be Helping You

It would be best to do your investigation to avoid a situation where you’re crying in your beer. As the buyer, you are responsible for ensuring that your home is of the quality you require and suitable for you and your loved ones.

Fortunately, there are steps you can take that will help you avoid buyer’s remorse. One of the roles of an exceptional buyer’s agent is to help you with these things. They should be your confidant and trusted advisor throughout the transaction.

It is one of the reasons I often speak about the value of having a buyer’s agent and rejecting dual agency where you have nobody in your corner. Never underestimate the value of an outstanding real estate agent!

Whether you are a first-time buyer or not, due diligence in real estate is critical. You can follow this checklist for what you need to know.

Is There Money Put Up While I Conduct My Analysis?

Due diligence money is another name for an earnest deposit. When you make an offer on a home, you’ll be required to put up a customary sum of money to be held in an escrow account. These monies ensure you’re a serious buyer and aren’t wasting everyone’s time.

Another way of looking at these funds is as “good faith money.” The seller will take the house off the market while the buyer researches.

It can also be called a real estate due diligence fee.

Buyers Can Get Their Money Back

It is not unusual for buyers to find something that causes them to withdraw from the purchase agreement in real estate transactions. Part of the purchase contract will state a buyer can get their diligence fee (earnest money) back when significant problems are discovered.

These “good faith monies” are held in an escrow account by the real estate broker that represents the seller. The real estate contract will state that the money will be released to the buyer or seller based on what occurs.

The local market dictates the amount of earnest money held, but you can expect between 1-5% of the purchase price.

To get their money back, buyers must notify the seller through the listing agent or seller’s real estate attorney before the real estate due diligence period expires. It is a good idea to recognize all the critical dates in the real estate contract and follow them.

A Home Inspection is Paramount

Your analysis and verification are certainly not done after you have committed to the home. Inspecting the house is usually a “contingency” in most real estate purchase contracts. The inspection will be one of your last opportunities to ensure you buy a sound property.

It will be your best opportunity to have a professional survey the property.

The inspection due diligence period is usually between 7-14 days after the home’s purchase. It is a crucial step to ensure you’re not buying a lemon. It is one of the most prudent expenses, given the safety risks that can be uncovered.

Inspections give you confidence the structures on the property are sound.

You’ll want the home inspected by a licensed inspector, not one of your relative’s “friends.” But you need to understand that home inspectors are only human. They can miss problems.

Realize that the home inspector only looks for things that need to be repaired or replaced—helpful information, but not all you need to make an informed decision.

The Home Inspector You Choose is Vital

Here are some tips for picking a home inspector that will increase the odds you are satisfied. Remember that the home inspector works for you and only you. If you are unsure about anything with the property’s condition, make sure you ask the inspector questions.

In the grand scheme, the home inspection cost is relatively minor compared to the amount you pay for the property.

While the home inspection is a significant step in the due diligence process, you can do much more. Please also realize there is more to checking out a property than just a general home inspection.

Here are some other things you may want to research:

• Check to see if the home has elevated radon levels, a known cancer-causing carcinogenic.
• Make sure the home does not have mold.
• If you have a well and not public water, check the quality and quantity of the water.
• If the home was built before 1978, you might want to investigate the presence of lead paint, especially if you have a child under six.
• A termite inspection is always wise, primarily if any suspected damage is found. Termites are commonly found in older homes.
• Research the presence of asbestos.

Tips for Avoiding Buyer’s Remorse

Consider some of the most crucial things when assessing the property and surrounding area.

Know How Disclosure Laws Work

A significant part of a home buyer’s real estate due diligence is getting questions answered. Every state has its real estate disclosure laws.

You should read your state’s disclosure laws and consult with a real estate lawyer and agent if you have any questions about what your state’s disclosure laws mean.

In many states, disclosure laws require that sellers disclose any tangible home defects they are aware of. Discernible defects are problems you can see and touch, like the foundation, electrical system, plumbing, roof, etc.

Sellers following the law will disclose tangible defects, but only the defects they are aware of.

Disclosure laws don’t work the same in every state, so it is crucial to understand how they work in your locale.

Some States Have Caveat Emptor Laws

For example, in Massachusetts, sellers are not required to disclose known defects with their property. This is known as caveat emptor or “let the buyer beware.”

Sellers must answer buyers’ questions honestly. So, if a buyer asks if there have been leaks in the roof, the seller must be truthful. Otherwise, they could be sued and lose.

Many homeowners are not aware of all the defects in their homes. They may have bought the property decades ago. Whatever issues were present when they purchased the house may have been fixed or forgotten.

Many new issues may have sprung up. A home’s many components can wear out with time and use. This is why inspecting the property is necessary: You need a third party to come in and tell you what is wrong.

Disclosure laws typically cover tangible issues—but intangible matters are less likely to be covered. Things like stigma, such as if someone died in the home, are not necessarily protected by the law.

You must ask specific questions if you want clear answers about intangible issues. Was anyone ever murdered in the home? Did anyone commit suicide? Do people report paranormal activity in the house?

If you want to know, you will need to ask.

Google The Address of The Property

Google is one of the best tools for auditing anything and is beneficial for the examination process in real estate. You can certainly Google the address of any property and see if anything unusual comes up. Look for any news that has impacted or could impact the home in the future.

This is one of the best ways to vet a real estate agent while you’re at it.

Google can be your best friend when doing your due diligence on a property.Click To Tweet

Request and Review The Seller’s Disclosure Statement

Seller disclosures are one of the most straightforward parts of investigations of your deal. They often provide records of repairs and other services the owner has conducted on the property. You can often glean how much care has been given to the home.

In many states, a seller’s disclosure statement is a requirement when selling a home. The disclosure statement lets a buyer understand what the seller knows and doesn’t know about their property. You may or may not be handed a disclosure statement by the seller’s agent. If not, ask for one.

Make sure you read it carefully. If you are unsure about anything, ask questions. It is wise to read the seller’s property disclosure before making an offer rather than making it part of the due diligence period.

There may be things in the disclosure that could cause you to second-guess your buying decision. You can ask the owner questions to help guide your decision if there are concerns.

Have a Talk With The Building Department

The building department in your city or town will probably know the home you are buying. They might be able to tell you about issues that will impact the property’s value.

The building department will also have information about permits related to renovations for the home. You’ll want to make sure the seller pulled all required permits.

Having sold real estate for the past thirty-eight years, many homeowners fail to obtain the required building permits.

As a buyer, you want the required city permits. If not, it could become your problem when you sell. While most towns will allow permits once a violation is discovered, some will not.

While it is rare, the town of Grafton, Massachusetts, will make you rip out work you did without a permit. Yes, you are reading this correctly.

Can you imagine finishing your basem*nt without a permit and having the town ask you to remove it? Well, that is precisely what Grafton is now doing. A mistake like this could cost thousands of dollars if not more!

Checking on permits should always be at the top of the list for due diligence in real estate.

Talk to The Neighbors as Part of Your Checklist

The neighbors may have information about the property and the neighborhood that you want to know before buying. You could learn something that changes your perspective on owning and living on the property.

One critical aspect of buying a home is learning about the neighborhood. Residents are a great resource.

Check any Restrictions on The Parking

Try to park your car(s) at the property, whatever that entails. See if your vehicle fits in the garage or parking space. Try parking at different times or other days of the week, especially if you are stuck with street parking.

Make sure you are okay with the parking situation before you commit.

Determine If There Are Any Encroachments on The Land

Does a structure look too close to the property line? The neighbors or another party may be currently encroaching on the property. Violations with property lines are not that uncommon. For instance, they may have built a storage shed that crosses one of the boundary lines.

Your lender should send someone to survey the property. If you are paying cash, there is no mechanism for this to happen. As the mortgage lender typically does this, it will become part of your due diligence. A property survey is not something you should skip.

Settling encroachment issues before buying is essential because they can be much harder to fix after you are the owner.

Have a Title Search Done

If you are getting a home loan, you won’t need to worry about this as it will be a lender’s requirement. If you’re paying cash, you should complete a title search. Buying a home is a substantial real estate investment.

Proper auditing requires checking the title, likely a standard part of the contract.

By having the title company or real estate attorney do a title search, you can ensure no title issues, such as outstanding property liens. Most real estate professionals recommend purchasing title insurance, and I would certainly be in that camp.

Asking your attorney for legal advice on this matter may be worthwhile. They are likely to agree.

You can avoid potential problems by having title insurance.

Should You Waive The Appraisal?

Appraisals are common contingencies in real estate contracts. They can help with negotiation when needed.

Skipping the appraisal can be tempting in a hot seller’s market. When getting financing, most mortgage lenders will require an appraisal if you put down less than 20 percent of the purchase.

Lenders do this to protect their interests. When there are bidding wars, one of the requirements buyers often face is removing the contingency. You’ll have to decide if this protection is worth it.

Local agents can advise on whether the current market conditions warrant the removal.

Speak With The Police Department

The local police can be a great resource when buying a home. You can ask the local police department about crime in the area where the house is located. The police may even be able to print out a report on the neighborhood.

Keep in mind in most neighborhoods, there are going to be minor nuisances. It’s the big stuff you want to be concerned about. The local police should be able to give you a good handle on crime rates in the area.

Examine The Homeowners Association (HOA) Closely

If you are buying a condo or a townhouse, you will probably be dealing with an HOA for the entire time you own the property.

You want to verify that it is an organization you want to be a part of—or at least one you can tolerate.

Meeting the management company and the trustees to discuss how they do things and any plans is worthwhile.

Even if you do not spend much time meeting the HOA managers, you need to review the association’s rules and financial statements to understand what you are getting into.

Over the years, I have encountered many people who have lived in single-family homes and downsized into a condo. The couples were disappointed quite a few times as they did not realize how different condo life could be.

Here are some things to consider before buying into an HOA.

Learn About How The Property is Zoned

Zoning officials can tell you what your property and adjacent properties can be used for. It can be helpful to know, for example, if your neighbor’s property can be used for commercial purposes.

You can also check with the town hall to ensure no proposals to change the local zoning. Every so often, this can happen. You might buy a property for the ideal setting only to find out it will change drastically.

Check if The House is in a Flood Zone

Checking if the home is in a flood zone is essential when performing research. It is one of the due diligence items you won’t want to miss. If it is, you must purchase flood insurance, which can be expensive.

Standard homeowners insurance does not cover floods. If you are getting a home loan and your home is located in a flood zone, the mortgage company will require you to have flood insurance.

You can check with your insurance company for a general idea of the cost. However, standard insurance does not cover floods.

Check the National Sex Offender Registry

When you have children, this is one vital item on your checklist before closing. Disclosures are typically not required.

If you have kids, you might want to check the National Sex Offender Registry. Anyone can search the registry to learn about sex offenders registered in their area.

If you want to be sure there are no sex offenders where you are buying, you should check the registry.

Disclosure of sex offenders nearby can vary, so do your homework. To avoid risk, you can also visit the local police department. They can guide on these risks.

Visit The Property at Different Times

Part of your analysis process should be visiting the home at different times and other days.

Parking is not the only thing that can change at different times and days of the week. You can check the traffic in the area, see what kind of people are hanging out at other times, and see what your commute will be like.

Some properties might have little traffic or noise during the weekend but are entirely different during the week or rush hour.

Get an Insurance Quote (or Multiple Quotes)

You can learn about the cost of your insurance premium ahead of time. Get several quotes to see what you’re going to be paying. See how you can save money on home insurance. You might want to start with the folks who currently insure your car.

Bundling auto and home insurance is one of the best ways to save money.

Is an Environmental Assessment Needed?

Are you buying near some environmental concern? Maybe you are purchasing near a gas station or high-tension wires? If so, it may be advisable to have an environmental site assessment to ensure no health hazards.

Environmental conditions in the area could necessitate this extra step in your real estate examination.

Check For Special Assessments

Another essential step in the diligence process is checking for any special assessments when buying a condo or townhouse. Doing so will be in your best interest to ensure no financial surprises once you own your new home.

You might think you’re paying a specific purchase price, but you will be spending much more if there are substantial special assessments. These fees are less of an issue with a single-family home unless there is an association with the neighborhood.

Checklist For The Properties Interior

Use this due diligence checklist to avoid making mistakes when buying real estate. Refer to it when purchasing a home.

• If there is a seller’s disclosure statement, look over it carefully for potential problems.
• Conduct a general home inspection, checking for radon, mold, asbestos, insects, water quality, and lead paint.
• Ensure no water penetration into the home, including past ice dam issues.
• When buying a townhouse or condo, ensure no special assessments or significant upcoming fee increases.
• Ensure they are allowed if you buy a condominium or townhouse and have pets.
• When there is a homeowners association, ensure no pending lawsuits.
• Ensure there are no open permits or work done that a building permit should have been pulled.
• Get a breakdown of the home’s utility costs.
• Check for any adverse history with the property, such as murder or paranormal activity.
• Research whether there were any recent insurance claims on the property.

Checklist For The Properties Exterior

• Ensure there are no buried underground oil tanks. If they leak, cleaning up can be an environmental hazard and very expensive.
• Research if there are any environmental issues close to the property.
• Check for any adverse conditions around the neighborhood bringing down property values. Here are some examples of things that could lower property values.
• Verify if there are any restrictive covenants or rules for the property.
• Make sure there are no upcoming zoning changes.
• Make sure there are no property line violations.
• Have a septic system inspection if there is no town sewer.
• Check to make sure the property is not in a flood zone.
• Look over school and neighborhood rankings.
• Check the local crime rate to ensure it’s not too high.
• Check property value trends – are they going up, down, or stable?
• If there is an HOA, make sure it has sound finances. Check the reserve fund to ensure there are no risks of default.

Interesting Statistics on The Right and Opportunity to Investigate

1. 87% of successful real estate investors prioritize conducting assessments before making investment decisions.
2. On average, real estate investors spend 4.5 weeks examining a property before finalizing the purchase.
3. A well-executed assessment process can save investors up to 15% on the property purchase price.
4. Approximately 79% of real estate transactions that fail to conduct thorough audits experience unforeseen complications or issues.
5. Most real estate professionals (82%) consider hiring a professional inspector essential to the research process.
6. Research shows that investing just 3 hours in conducting thorough market analysis increases the likelihood of long-term returns by 43%.
7. An estimated 92% of real estate developers conduct environmental assessments as part of their assessment process.
8. Studies indicate that conducting financial analysis and reviewing historical performance data during research can lead to an average annual return increase of 8.7%.
9. According to industry experts, investing in hiring legal counsel during the audit phase reduces the likelihood of litigation by approximately 65%.

Final Recap

Doing audits is critical when buying a home. Use your real estate agent as a sounding board and someone who can help you do meaningful research. Make sure you are comfortable with anything you discover. The last thing you want is buyer’s remorse.

Once you own the property, don’t do anything to make the home more challenging to sell or bring down the value. At some point in the future, you will become the seller.

Hopefully, you have found these tips on proper due diligence for a real estate purchase helpful. The importance of adequate research by reviewing documents and reports can never be understated. The more liability you can remove, the better.

By auditing these items, you’ll be ready for closing. A home is a significant investment. By going through the search process in your sale, you’ll be ready for homeownership.

Additional Helpful Home Buying Resources

• Inexpensive improvements after buying a home – See some of the best improvements to make around your property that will add value via Karen Highland.
• Home inspection tips for buyers – as mentioned previously, one of the most vital parts of a sale is the home inspection. Luke Skar provides valuable insights on what you should know about home inspections.

Use these additional resources to make the best decisions when buying a home.

About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on due diligence for real estate. He is an expert in mortgages, financing, moving, home improvement, and general real estate.

Learn moreabout Bill Gassettand the publications he has been featured in. Bill can be reached via email atbillgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.