Real Estate: What is Due Diligence?
By Jess Barron, Lindsey’s Inc. Realtors
When purchasing real estate, it is important to know what a “due diligence” period is. This is the opportunity for the buyer to do their homework and discover information about the property they are purchasing. The due diligence period is negotiable between the buyer and seller and is part of the purchase and sale agreement.
In residential real estate, this time period is typically the first 7 to 14 days of the contract, but can be longer or shorter. This is the best time for a buyer to conduct a home inspection. Some people think of due diligence like an option. The buyer can option out of the contract without any penalty and have their earnest money returned in full.
Regarding home inspections, the buyer can use the ability to option out of the contract as leverage for concerns found during the home inspection. The purchaser may ask the seller for home repairs during this time period and may opt out of the contract if the seller does not agree. This puts a lot of pressure on the seller to handle some, if not all, of the requests made by the buyer. This is quite the change from the “buyer beware” era of real estate in the past, when there typically was no due diligence period and the buyer was “locked-in” the contract.
Home Inspections are not all that is conducted during a due diligence period. In land purchases, a buyer may perform a perc test, to confirm that the soil is sufficiently permeable to water. This is necessary in rural areas for septic tanks. If the land is being rezoned, the purchaser may need a lengthy due diligence to determine if the local government will rezone the property for the intended use. For example, a buyer may want to rezone a property from rural conservation to commercial. This would require a rezoning hearing with the local governing authority. Typically, you will see several months of due diligence allowed for this process.
In the history of real estate, the due diligence period is still a relatively new concept. Due diligence is controversial to some agents as they see sellers getting taken advantage of. A buyer beats a seller down on price initially during the contract negotiation and then comes back again a few days later to negotiate again during the due diligence period. To protect themselves, sellers can attempt to sell “as-is” with no repairs.
In a strong real estate market, the seller can also use their market to advantage. If the buyer threatens to back out during due diligence, it is likely the seller will find another buyer quickly. This gives the seller some negotiation power. At the same time, it may be very difficult for the buyer to find another home in a competitive market.
Jess Barron is an Associate Broker with Lindsey’s Inc. Realtors and former President of the Newnan-Coweta Board of Realtors.