Doing your due diligence

When industry experts say you must do your due diligence, they say it for a reason. They are advising buyers and sellers to ensure that the property being acquired is suitable for their needs. It specifically involves researching documents, financial calculations, evaluating risks, and inspecting buildings or structures included with the property. The due diligence period normally runs between 30-90 days, depending on the terms of the Purchase and Sale Agreement. During those 30-90 days, buyers are responsible for conducting primary research on items such as zoning permits and title exceptions; economic factors such as market supply and demand; building inspections; environmental due diligence; and more. A deposit will typically be held by a third party from both the seller and buyer until the end of the due diligence period. If the buyer decides against proceeding with the transaction after the expiration of the due diligence period, the deposit is forfeited by them.

Although the due diligence period is standard practice, it is possible to customize the length of time depending on the circumstances of the transaction. You’ll need to understand all aspects of the transaction before proceeding with a purchase so you can make an informed decision. This article will outline the steps needed in order to fulfill the proper requirements of due diligence, including: carrying out a home inspection, appraisals, title searches, land surveys, considering disclosure statements and HOA/zoning rules, and reviewing insurance coverage.

Home Inspections

For buyers, you will want to tag on home inspections as a part of your due diligence process. A home inspection is a thorough examination of the property's condition, including the roof, foundation, plumbing, electrical, heating and cooling systems, and more. It is designed to identify any issues or potential problems with the property that may not be immediately visible to the naked eye. A professional home inspector will provide a written report detailing the condition of the property and any issues that need to be addressed.

Appraisals

An appraisal is an unbiased estimate of the value of a property, based on a variety of factors such as location, size, age, condition, and recent sales data. An appraisal gives buyers insight into whether or not a property's sale price is fair market value. Lenders will also need to have the appraisal on file before they agree to finance the purchase. 

Title Searches & Land Surveys

A title search is a thorough examination of public records to confirm ownership of a property without any hidden liens or pending lawsuits. It is essential to ensure that the property is free and clear of any encumbrances before proceeding with the purchase. 

A land survey is a detailed map of a property that identifies the boundaries of the lot. Having a land survey completed will certify that there are no disputes over property lines or encroachments.

Disclosure Statements

Disclosure statements are another important factor to consider during the due diligence period. A disclosure statement is a document that provides details about renovations completed without permits, environmental hazards, or other concerns that may affect the value of the property. It is important to review the disclosure statement carefully before proceeding with the purchase in order to be aware of any potential issues.

HOA & Zoning Regulations

Different Homeowners associations have different restrictions or requirements. Before purchasing a property in a community governed by an HOA, make sure you review these rules to the full extent. Zoning regulations are also important to review as they help determine allowable uses for land within communities.

Insurance Coverage

Having adequate insurance coverage for the property can protect you against potential losses or damage, and is an important factor in the process. Review the insurance coverage before financing the purchase, in order to confirm that it meets the lender's requirements.

Conclusion

No matter if you're a buyer or seller, due diligence is necessary if you want a smooth and successful transaction. Before proceeding with a purchase, buyers will want to thoroughly evaluate the property and all relevant factors before making a decision. While due diligence comprises several tasks, this checklist provides you with everything you need to know before starting. If you are unsure about doing it on your own, there are professional consulting companies that can assist parties in obtaining reliable information during the due diligence process. These companies will help you understand the legal and financial implications of the transaction and guide you through the process. 

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