The due diligence process in real estate transactions gives buyers a time period to better protect themselves from making unwise investment decisions. This period of time is similar to school homework with a deadline for completion (or due date), which is known as the due diligence period.
In the U.S., most states allow residential property buyers to conduct due diligence for up to two weeks. Commercial property buyers may have up to two months, partly because of a more complicated background check.
What is due diligence in real estate?
The due diligence process happens during a real estate transaction, usually after the seller accepts an offer and before the deal is closed.
In some situations, home buyers may conduct informal due diligence by scouting the location of the property. For example, some buyers do this by researching the neighborhood and its distance from public amenities (e.g., hospitals, schools).
The formal start of due diligence, though, depends on your contract with the seller. It may begin once you open an escrow account or as soon as you sign a non-binding agreement.
How do I conduct due diligence on properties?
A real estate agent or broker can help a buyer conduct due diligence on a property. Professional assistance can guard against overlooking important steps.
For most buyers, the due diligence phase begins with inspecting the property, followed by an appraisal. Some hire a surveyor to map out the entire property’s boundaries.
Once any signs of physical problems with the property have been ruled out, the next step usually involves checking the property’s financial and legal status. Hidden claims, liens or unpaid taxes are all things to look for, which can be done by conducting a property title search. Most property sellers disclose every single detail about their properties, but some information may remain undisclosed. A title search reveals what the seller might have failed to tell you, whether by accident or otherwise. A title search also confirms that the seller is the legal owner of the property.
Once you’re satisfied with the results of the due diligence process, it could be necessary to waive the contract’s contingencies in order to move forward with an escrow deposit.
What happens if I skip due diligence in real estate?
The due diligence period in real estate deals isn’t a mandatory obligation for home buyers. However, those who forego the due diligence period could expose themselves to financial and legal risks.
Skipping the due diligence period and agreeing to acquire the property in its current state renders the buyer responsible for settling any unpaid taxes, liens and lawsuits related to the property.
Home buyers who move forward with the purchase of a property without doing a title search may also encounter a costly legal dispute on ownership. These risks can sometimes be greater when purchasing luxury property.
This is why a thorough due diligence process with the help of an elite real estate broker is well-accepted and generally the best bet.