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Home Buying: What is Due Diligence?

Posted by Sarah Steen on June 14, 2022
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picture of a laptop with a photo of a kitchen with "Real Estate Due Diligence" caption

 

Due diligence in is probably one of the most obscure and misunderstood items in a real estate transaction. We have written about this step in the home buying process before, but it remains a confusing subject for buyers and sellers alike. Therefore, it justifies another detailed review. We will additionally review some due diligence changes to the 2022 Real Estate Contract to Buy and Sell.

Click here to download the Home Buyer Guide

What does “due diligence” mean?

You might have heard of the term “doing your due diligence” in other areas of life. Due diligence usually refers to researching a situation to make an informed decision. This could be for a business, educational opportunity, or major purchase like a car or home.

Due diligence in real estate is the same idea. It’s when a buyer researches everything they can during the contract period: financial and maintenance documents, physical condition of the home, insurance documents, the land the property is built on, the environment and surrounding areas. This information gathering helps a buyer decide if this is a property they would like to follow through with purchasing.

Due diligence is a requirement for every property purchase.  This step of the home buying process can be a tremendous amount of work for buyers and sellers, and it usually has to completed within a fairly short amount of time during the contract period. But it is an absolute necessity in order to make the right decision on one of your largest investments.

Related Reading: Steps to Buy a Home

Why is due diligence so important?

As mentioned above, due diligence is an important step for home buyers to make an informed decision about moving forward with their purchase. Additionally, it’s important for sellers to disclose everything they know about the home. Most real estate issues that end up in court are items pertaining to the home’s condition or facts that were  incorrectly disclosed or withheld by the sellers. Home buying due diligence is important as we always experience, that generally defects in a house are not a big deal as long as the defect is known to the buyer.

Related Reading: What is the inspection period?

When does due diligence occur?

Due diligence happens throughout the purchase process. It actually begins before you even step foot in the home. When a home catches your eye at the right price, size and general location, the next step in your due diligence begins simply by taking a look at the property. A showing can provide vital information to the buyer about the home:

  • What is the condition of the home?
  • Does the home look like it did in the pictures?
  • How big is the lot?
  • Which way does the house face?
  • Is the fence high enough?
  • Does it have all the features needed for a happy life?

A showing also brings up questions that buyers would ideally answer before they even offer on a home.  For example, it would be a shame to finally win a bidding war just to find out that your large truck doesn’t fit in the garage and the HOA rules do not allow you to park it outside the garage.

Related Reading: Home Buying: Time for Showings

Pre-Offer Due Diligence

If everything worked out and you’d like to make an offer, you and your REALTOR® will review the information detailed on the MLS listing. This general information will help you make an appropriate offer on the home:

  • Which specific items (installed or not) in the home are not included in the purchase price?
  • What other improvements are on the property?
  • What utilities are at the property?
  • Review Regional Building permits to determine age of appliances and find out what changes have been made to the home.
  • Review taxes from a previous listing for the property.

Related Reading: Home Buying 101: Making an Offer

Due diligence period during contract time

You might not have time to investigate everything BEFORE making an offer if the real estate market is moving quickly. After an offer is accepted, buyers are bombarded with disclosures and other documents from the seller and the sellers agent. These could include:

  • Source of Water Disclosure
  • Well information, if applicable
  • Square Footage Disclosure
  • Sellers Property Disclosure
  • Title information, Off Record Title information
  • Lease/tenancy agreement and tenant estoppel
  • Other leases of items on the property (solar)
  • Any due diligence items that are in the seller’s possession
  • HOA documents
  • Inspection reports
  • Lead Base Paint Disclosure, if applicable

This is just a starting point and can be quite overwhelming. Therefore, it is important to have REALTOR with experience and continued education by your side to maneuver these waters. After all, this paperwork will all come in at the same time you are scheduling inspections, working with your lender to move your mortgage financing forward, and managing your regular day to day life. Stay the course! Expect to do a lot of reading to ensure this home purchase is the right decision for you and your family.

Keep in mind that there are multiple deadlines in the Contract to Buy and Sell that give you the right to object, ask for corrections, and/or walk away without losing earnest money. Time is of the essence to keep up with these deadlines while doing your research. Remember, your real estate team is by your side every step of the way.

Related Reading: Steps to Sell a House

What’s new in 2022?

Housing features change all the time and it’s important to review and adjust the Contract to Buy and Sell to account for these changes.

Solar Panels:

Many items within a home might be leased by the current owner: security systems, propane tanks, water softeners, etc. Here in the Colorado Springs real estate market, we are seeing an increasing number of leased or purchased (encumbered) solar panel systems.

Solar panel systems have a big price tag. If a buyer has to take over a lease for the solar panels, it could potentially put the buyer out of their preapproved loan maximum. It’s vital to obtain information about solar panels as early as possible in the transaction to avoid any surprises that could make a contract fall apart.

  • Are the solar panels fully paid off or currently financed?
  • If the solar panels are still financed, the contract will need to establish if the seller plans to pay off the panels at the time of closing and therefore releases the encumbrance. This will make it possible for the buyer to receive the title for the house free of all defects.
  • If the buyer agrees to take over the lease, the lender will require the buyer to apply for and qualify for a loan as if they were the original solar panel buyers. The buyer will need to speak with their lender as soon as possible in the transaction if they intend to take over the lease. Securing a loan for solar panels could take additional time, so a 4 week closing on the house might not be feasible.
  • Are you selling a home with financed solar panels? Consider paying off the loan at closing and you might be able to increase your list price. The appraiser will include the solar panels in the value of the home IF they are paid off at closing.

Home buying can be stressful but our team is here for every step of the way. Questions? Our team is always here to help. Give us a call (719-219-9739) or email susanna@co-regroup.com.

Click here to download your free home buyer guide