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What is the due diligence period?

[fa icon="calendar"] May 18, 2020 1:00:00 PM / by Eli Karpovski

Eli Karpovski

The due diligence period is perhaps the most important part of any contract for a buyer. It allows the buyer time to do all inspections and investigate anything about the property. Beyond its physical condition, the buyer can also review documents associated with the property in order to decide if the buyer wants to proceed with the purchase. Once this period has passed only specific contingencies protect the buyer from having to move forward with the purchase. 

During the due diligence period the common items to review are:due diligence period

Written seller's disclosures are used in most states. Some states require it and have a monetary penalty to the buyer for not providing one.  In those instances, most sellers elect to pay the penalty instead of exposing themselves to legal liability. In areas that they are not required, it's simply the option of the seller to provide a written disclosure. Agents will always be required to disclose material facts about the property, so long as they are aware of them.

Home inspections are done by licensed professionals. Hiring an inspector is completely the choice of the buyer. The bigger the property the more likely a buyer will miss something important. It is recommended for freestanding homes or townhomes to hire an inspector. When shopping for apartments this can be overkill since any buyer and their agent should be able to check the contents of the apartment without hiring anyone. 

Appraisals are always required by banks to ensure to the bank that the property has at least the value of the contract. Cash buyers can also use appraisals to verify that what they are purchasing is correctly priced. If it doesn't appraise, it can be a point of renegotiation if the seller is willing to make an adjustment. 

HOA and Offering Plans are where most surprises can come up when buying an apartment. Attorneys will review the documents, including the meeting minutes, to see if there are any financial problems with the building. If there are any issues that are in dispute within the building or between the building and others, this is where it will be found. Any clues to upcoming special assessments will be exposed here too.

Title and survey are items typically ordered for each sale transaction. A title search will be performed as close to the closing as possible. This is to make sure new title defects don't show up between the time of the title search and the closing. If any defects do sneak in during that small window, be sure that your title insurance has the correct coverage. A title search will identify any outstanding liens or other encumbrances on the property that should be cleared up before a transfer of title. Surveys are used to ensure the property lines are what they are believed to be. If any encroachments exist, the buyer should be aware before closing, even if the seller is not aware.  It is possible to save some money on a survey if all parties agree that an affidavit of no change is sufficient.  This is a document that the seller would sign stating that the most recent survey the seller is providing has no changes. 

Insurance is important to look into since it is a fixed lifetime cost as long as you own the property. It is best to contact at least one insurance agency to find out if there is any issue with insuring the property. It's also wise to get some quotes to see if there is any special added costs in insuring the subject property. Knowing this as far in advance as possible is best for any buyer. It can also be a point of negotiation should there be some surprise added costs. 

Topics: Selling, Buying

Eli Karpovski

Written by Eli Karpovski