Navigating Due Diligence

Due diligence is an important part of buying, selling, and investing. It involves a complete examination of many things related to the transaction. This makes sure that all parties involved have a clear understanding of a property’s condition, value, and potential risks. In short, it is a period to gather as much information about the property before deciding to move forward with the home sale.

Listing details, showings, and open houses only provide a certain amount of information. Disclosure statements also share more known details about the property. However, there can still be issues that the seller is unaware of. As a result, in the purchase agreement, a buyer and seller negotiate and set a due diligence period and due diligence fee.

Due Diligence Period

A due diligence period in North Carolina is the time for the buyer to do their investigation of the home and make important decisions. The biggest decision determined from this period is whether the buyer will move forward with the purchase or not.

How long is a due diligence period?

The length of this period is determined and agreed upon by the buyer and seller. In general, 2-4 weeks is typical for real estate transactions. More complex transactions may have longer due diligence periods.

Due Diligence Fee

Due diligence periods typically come with a cost. In most cases, for a seller to agree to a due diligence period, a buyer must pay a due diligence fee. This is a courtesy since the home will be off the market while the buyer conducts their investigation.

How is the due diligence fee paid?

The fee is paid directly to the seller at the time the initial purchase agreement is signed. If the buyer backs out of the agreement, the seller keeps the due diligence fee. If the buyer moves forward with the sale, the amount in due diligence is deducted from the closing cost amount.

What is investigated?

During a due diligence period, a buyer often investigates as much as possible. Some investigations require the buyer to pay additional fees. This is not an exhaustive list, but here are some of the most common things researched during a due diligence period. For a checklist suited for investors, check out this list provided by the Motley Fool.

Property Condition

This is what people think of as the “home inspection.” This covers an overall inspection of the home and its condition. It may include separate inspections for specific areas of concern also. For example, a buyer might hire a specific roof inspector or structural engineer to further investigate the home.

Title

Researching the title provides verification of the ownership history and ensures there is nothing that can affect the transferability. Outstanding liens, encumbrances, or other legal issues would show up on a title search and could impact the sale.

Zoning & Land Use

A zoning inspection will confirm that the land is being used exactly as it legally should be. This is especially important for commercial properties.

Land Surveys

A land survey determines the property’s boundaries and prevents any encroachment or boundary disputes.

Legalities & Liabilities

Any contracts, leases, and easements will need to be reviewed. For example, if the property has an easement, the buyer will need to understand which individual or party will have a right to access that property and for what reasons.

Financial Analysis

If the property is being purchased with the intention of being a rental property, a financial analysis can help determine the expenses, taxes, and potential rental income.

Environmental Hazards

It is important to determine if any environmental hazards or contamination is on or near a property. This is especially crucial for commercial real estate.

Compliance

Is the property in compliance with local building codes, permits and other requirements? For example, if work was completed on the home, proper permits should have been obtained.

Taxes

Additionally, a buyer might want to do a deep dive into the tax situation. What are the required property taxes or potential tax incentives?

Different property types will require different inspections or investigations. Having a period for these to be done gives the buyer and seller a clearer picture of the condition of the property. A due diligence period gives opportunity for risks to be mitigated and decisions to be made.

Typically, a buyer is the driving force behind the due diligence period. However, sellers can also be proactive in doing some of these investigations themselves. Having knowledge of the property’s condition and any issues found while investigating, a seller can address any complications and make the selling process smoother.

As an experienced and professional real estate team, we recommend that buyers take the time to thoroughly vet the property they are interested in. This will better equip them to make the decision to purchase or not. If you are looking for a knowledgeable group to assist you, the Oak & Main Real Estate Group would love to partner with you.