Due diligence in real estate refers to the process of investigating and evaluating a property before finalizing a real estate transaction. As a real estate agent, you must understand “what is due diligence?” so you can help your buyers or sellers minimize risks and make informed decisions.
Understanding Due Diligence
In business, due diligence refers to the “research and analysis of a company or organization done in preparation for a business transaction.”
In real estate, due diligence usually refers to the buyer’s research before making an offer or research completed during the contingency period before the final closing.
While due diligence is essential to every real estate transaction, it is less complex in residential than commercial or investment real estate.
How Does Due Diligence Work in Real Estate?
During real estate transactions, the due diligence period typically starts as soon as the buyer and seller accept the Purchase and Sale Agreement – and the buyer has made a deposit. During this contingency period, the buyer, with the help of their agent, collects all the information about the property to help make a final decision about whether the buyer will proceed with the transaction.
Due Diligence Requirements
The specific requirements for due diligence can vary and are typically outlined in the terms of the Purchase and Sale Agreement, which is signed off on by both parties. A typical due diligence period runs between 30 to 90 days. During that window, there are often required time frames for specific contingency items dictated by state law.
Due Diligence Checklist
As a real estate agent, part of your job will be to teach both the buyer and seller about due diligence requirements in residential real estate. Here’s a checklist that covers various aspects of residential real estate due diligence. Some of this checklist is completed before the offer is made on the property. Other items are completed after the Purchase and Sale Agreement is signed.
1. Property inspection
A licensed real estate inspector checks the property’s structural integrity and overall condition of the home’s exterior and interior elements and systems. The property must comply with local zoning laws and building codes.
2. Title and ownership
As a part of due diligence, the buyer must confirm ownership details to ensure the seller has the legal right to sell the property. A title report is obtained to check for liens, easements, and other potential encumbrances to the sale.
3. Survey and Boundaries
It is part of due diligence to obtain a property survey to confirm boundaries and easements.
4. Financing
A buyer must understand all the costs of purchasing the property, including the closing costs and the mortgage terms.
5. Homeowners Association
The buyer must review the HOA documents and regulations and understand any restrictions, fees, or special assessments.
6. Homeowners insurance
Homeowners insurance is required for homes with a mortgage. The buyer must obtain information on homeowners insurance coverage and premiums.
7. Property taxes
It is part of due diligence that the buyer understands the property’s tax and payment schedule. It’s also up to the buyer to be aware of any potential changes in property tax.
8. Utilities and services
It’s essential to confirm the availability and cost of utilities and other necessary services such as water, gas, electricity, trash, and internet.
9. Environmental factors
It is part of due diligence to check for potential environmental hazards in the area. For example, the property may be in a flood zone or an area with elevated earthquake risk.
10. Pest inspections
Some buyers hire pest inspectors to check for infestations or damage caused by pests.
A Real Estate Agent’s Role in the Due Diligence Process
A real estate agent plays a crucial role in the due diligence process, acting as a guide and facilitator for buyers or sellers. Here are some key roles you will play as a real estate agent.
Provides information about property values: You’ll provide critical information about the local real estate market, neighborhood trends, and property values to help buyers and sellers make informed decisions.
Recommends reliable experts: Real estate agents often have a trusted network of professionals, including inspectors, appraisers, and attorneys, to assist with various aspects of due diligence.
Coordinates inspections: Real estate agents help coordinate property inspections by scheduling appointments with inspectors and ensuring that the necessary access to the property is provided.
Explains documents and processes: Agents educate their clients on the various documents critical in real estate transactions, including the purchase agreement, seller disclosures, or any other legal or financial paperwork. They make sure that their clients understand their rights and obligations.
Monitors timelines: Due diligence often involves strict timelines for inspections, document review, and other tasks. Real estate agents help keep track of deadlines and ensure that buyers and sellers meet their obligations within the required timeframe.
Assists with contingencies: Many Purchase and Sale Agreements include contingencies that must be satisfied during the due diligence period. Real estate agents guide clients through the process of fulfilling these contingencies.
Communicates on behalf of their client: Real estate agents streamline communication among all parties to ensure a smooth due diligence process.
We know this list of tasks may cause you to feel anxious if you are considering a real estate career. However, as you complete your pre-licensing education requirements with Colibri Real Estate, you will learn all this critical information and more. Our informative courses will help you become an excellent real estate agent who will smoothly guide your clients through the due diligence process.
Get started in your real estate career by signing up for your state-specific pre-licensing course with Colibri Real Estate today.
Sources:
- “Due Diligence Definition & Meaning.” Merriam-Webster. Accessed December 12, 2023. https://www.merriam-webster.com/dictionary/due%20diligence.
- “What Is the Due Diligence Period in Real Estate?” VERTEX, April 28, 2023. https://vertexeng.com/insights/what-is-due-diligence-in-real-estate/.
