Due diligence is a part of every real estate transaction and it’s important to know what it’s for and how it can affect the transaction. Here’s everything you need to know so that you can be prepared for your home purchase.
Contents
- What is Due Diligence in Home Buying?
- What Happens Between Due Diligence and Closing?
- What Happens When Due Diligence Expires?
- Can You Get Due Diligence Money Back?
- Appraisal After Due Diligence
- Can a Seller Back Out During Due Diligence?
- Can a Buyer Back Out After Due Diligence?
- What is a Normal Due Diligence Period?
What is Due Diligence in Home Buying?
Due diligence is the timeframe where buyers are able to investigate the home in full detail (physical aspects, documentation, etc.).
There is also a due diligence fee which is paid by the buyer to the seller – this is typically a non-refundable fee should the buyer decide to back out of the agreement before close.
What Happens Between Due Diligence and Closing?
Physical Inspection
During this time, you’ll want to take a look and see if there’s any repairs that may need to be done to the home prior to closing. Your agent can help either put in a request for repairs or renegotiate the contract to include a reduction of the purchase price to make up for the repair cost.
Appraisal
Your mortgage property will want to have the home appraised to verify that the purchase price matches market value for the home. If the price is valued drastically less, the seller may need to lower the price of the home. If not, the bank has the right to decline financing. You will have a separate appraisal contingency period in which you will have to have the appraisal done by.
Homeowner’s Association (HOA)
If your home is in an HOA community, you will want to review all documentation on the rules and regulations of the neighborhood, in addition to HOA fees that will be paid separately, but in addition to your mortgage payment.
Title Inspection
During the due diligence period, your title company will look into the home to ensure the current title is clean and there’s not anyone else who can come in afterwards and state that they have any claim in the home. They will also search for any other issues, such as outstanding liens, that may cause complications in the transaction.
Verify Rent (If rental property)
If this is a rental property that you are purchasing with current tenants in it, you will want to verify that the rent the current tenants are paying is matching or close to what rent should be for the property based on current market value.
Prep Paperwork (for insurance, mortgage, etc.)
Make sure that you have all of your paperwork in place and start working on home insurance. You will want to keep these all in one spot in case you have to get to them quickly for any reason.
What Happens When Due Diligence Expires?
Basically, if due diligence has ended, the buyer is no longer able to back out of the purchase without losing earnest money (unless there’s a serious issue proven with the home that was not disclosed nor found, or another contingency).
Can You Get Due Diligence Money Back?
The due diligence fee is non-refundable, unless the seller is unable to fulfill the contract.
If the buyer backs out, the fee is forfeited to the seller.
Appraisal After Due Diligence
Due diligence is normally 10 days, whereas the appraisal contingency period determines the time in which you need to have your appraisal back by (this is typically about 14-18 days).
If the appraisal does not come back within the appraisal contingency period, you will lose your earnest money should you decide to back out of the deal at that point due to a low appraisal value.
Can a Seller Back Out During Due Diligence?
If a seller has set up a contingency in which they are able to back out without penalty, then yes.
You can see this as the seller’s “due diligence” period. It’s uncommon that a seller would back out during due diligence, but they might do so due to a low appraisal, the inability to find their next home, or something unexpected has changed with their life circumstances (a death in the family, loss of their job, etc.).
Can a Buyer Back Out After Due Diligence?
No. Once the due diligence period is over, the buyer cannot back out without a contingency. If they do, the earnest money deposit is forfeited.
What is a Normal Due Diligence Period?
Due diligence typically lasts 10-30 days but vary for each transaction.
