June 24, 2022
You've probably heard the term caveat emptor — or "buyer beware" — at least a few times. But how does this statement apply to home buying? When it comes to real estate, caveat emptor is all about the steps taken before a purchase in a process known as due diligence. For home buyers and their agents, due diligence involves many moving parts. That's why a real estate due diligence checklist is a must-have.
After all, closing a deal involves constant communication with multiple stakeholders, all under serious time pressure. It's an important part of your transaction management and a lot to keep track of — especially when you have multiple deals in the works at one time.
But what is real estate due diligence? Read on to learn about the components of due diligence and how to complete the process with confidence.
Due diligence refers to a home buyer's responsibility to thoroughly research a property's suitability and value before finalizing the purchase. A home purchase represents a huge investment, so buyers should be as informed as possible. A buyer needs to know exactly what they're agreeing to purchase, before the property transfers ownership.
That means a comprehensive investigation of a property. A buyer should research both the physical structure and the financial aspects of a property to identify any potential problems with its suitability or its value— and the buyer's agent should be there to help.
The due diligence process involves research — but not just at the surface level. The physical structure of the home must be inspected by an independent, professional inspector.
The inspector will look for any needed repairs or replacements. For instance, they may look for plumbing, electrical, foundation or roof problems. Termites, mold, radon levels and water quality may be on the inspector's radar, along with potential issues such as easements, code violations, additions and zoning compliance.
But physical issues aren't the only focus of due diligence. Financial considerations are just as important. For instance, the title should be thoroughly investigated to make sure there aren't any encumbrances on the property. Tax records, liens, bankruptcy and any judgments or claims against the home should be brought to light before the sale is finalized.
Any potential issues due to location should be researched, as well. Flooding, earthquakes, wildfire and other risks may all affect a home's suitability and value. Proximity to amenities, like schools, shopping and public transportation, may also affect value and desirability.
Some properties may require an environmental assessment. This may include threats like soil or groundwater contamination, or the presence of asbestos or lead paint.
Finally, buyers may want an independent appraisal. If the home purchase is being financed by a third party, this is usually a requirement. The lender will want assurance that the home's purchase price isn't higher than its actual value.
These components play a role in the due diligence process. As a buyer's agent, a comprehensive understanding of the process — and a real estate due diligence checklist — can help you navigate this complex terrain.
When a buyer makes an offer on a home, the purchase offer contract will include time to perform due diligence duties. This takes the home off the market and gives the buyer time to perform their research.
The due diligence period usually lasts from seven to 14 days. The time period depends on local real estate norms, and differs by geographic location.
During the due diligence period, the buyer should research everything they can about the property. This means the physical structure, the history, and the financial aspects of the property. A trustworthy buyer's agent will be there to help along the way.
What if the buyer discovers a problem? Usually, buyers can back out if issues are uncovered during the due diligence process without losing their due diligence fee. The fee, usually from 1 to 5% of the purchase price, is held in escrow during the due diligence period. The buyer must notify the seller before the due diligence period ends if they want to get their fee back.
Specific dates will be laid out in the purchase offer contract. As a buyer's agent, you can help your client understand the details and stick to the timeline.
Use this real estate agent checklist to help guide the due diligence process.
An understanding of the following factors helps buyers determine suitability and value:
The climate, weather, flora and fauna in certain areas may pose risks. Start with natural disaster risk data, such as flood maps, earthquakes, wildfires and severe weather.
But certain locations may experience pest infestations, lie in coastal areas that make metal structures prone to rust, have trees that may fall and cause damage, invasive plant species, and animals or vermin that can cause damage to homes in the area.
Though not all states require sellers to disclose everything, some locales require sellers to disclose problems. Carefully review the disclosure statement with your client.
If you live in a caveat emptor state, recommend further inspections.
The buyer should retain a licensed, professional home inspector to complete a thorough inspection and produce a detailed report. In some cases, a specialty inspection may be warranted (radon, mold, etc).
Most lenders will require an appraisal. But all buyers should order one, as it will help determine if the purchase price is aligned with a home's value.
Do any zoning laws apply to the property? Buyers should know, because zoning can affect outbuildings, what types of animals, vehicles, trailers they can have, and other factors that may influence whether a property is suitable.
Check with the government planning and building/safety departments. Look for any projects that may affect the property's value and suitability in the future; perhaps a jail is going to be built on the next block, or a waste management plant is being expanded nearby.
Before purchasing a home, buyers must know if any encumbrances exist. A title search will identify any liens, tax issues or other potential claims against the property.
If the property is in an HOA-governed neighborhood, help the buyer identify the covenants, conditions and restrictions (CC&Rs) that they'll have to follow. These may include use of common areas, appearance of the home and landscaping, pets, rental conditions, noise, parking and other behaviors.
Real estate due diligence is complex, but necessary in order to minimize risk for both the buyer and for you. An understanding of due diligence can help you help your clients, and a real estate agent checklist allows you to stay on top of the many moving parts involved.
For even more support, Shaker’s end-to-end transaction management software makes it easy for your team to communicate and manage deals from start to finish. Request a demo and see how Shaker can help your real estate career grow.
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