Buying a house is exciting, but before you get carried away dreaming about how you’ll lay out your furniture, don’t forget: This is a legal transaction. As a buyer, that means you have to do your due diligence from both a practical and contractual perspective.
What does due diligence mean in residential real estate? And how do buyers know if they’ve done it well?
“It’s important that buyers look at every detail. Some people just focus on a home inspection and that’s not enough. A buyer really needs to get to know the home they’re purchasing, so that there are no regrets.”
That’s why we’ve put together this guide to due diligence for a homebuyer. From area research to title research, we’ll walk you through the process — and provide you with a printable checklist as well.
What is due diligence in real estate?
Due diligence refers to the buyer’s obligation to research the property and understand what they are purchasing before the house transfers ownership. Each purchase offer contract stipulates a certain amount of time in which the buyer is able to perform certain due diligence duties.
What should be on my due diligence checklist for real estate purchases?
Pagano says that as you’re working through your due diligence checklist, your real estate agent is your best resource. They should help you address each point and offer assistance in how to find information.
Everyone’s situation is different, but your agent can rely on past experience to help guide you through this important time.
Research the area
You’ve heard the age-old real estate adage: location, location, location. And it’s true! Understanding what the area is like and what’s coming in the near future can help you make a wise homebuying decision.
Ask your real estate agent to help you gauge the current real estate market in your preferred area. Some things to note:
- Median home price: Certain neighborhoods have a higher or lower price point. Ask your agent what makes homes in neighborhood A worth more than homes in neighborhood B.
- Days on market: The speed at which houses are selling can be telling. If houses are sitting on the market for a while, you may get a better deal … but is there a reason why buyers are shying away from a particular area?
- Number of owner-occupants: Often purchasers see higher owner-occupancy as an indication of more stability and satisfaction with the area. There may be more “pride of ownership” seen in the maintenance of neighboring properties versus a neighborhood with a large number of rentals.
- How many homes in foreclosure: A high rate of foreclosures could be a red flag in terms of neighborhood valuation, maintenance, and turnover.
- Price growth trends: Does your preferred neighborhood have consistent price growth over time? Does it match the trends of other nearby neighborhoods?
- Future developments: Research any commercial land purchases or leases in the area and see how they fit in with your desires. You may be pleased to know your favorite grocery store is moving in, or you may be disappointed that you’ll have to deal with extra traffic.
Discuss common local home issues
Before you buy in a certain area, ask your agent –– and current residents, if possible –– about any unique issues that homeowners should be prepared to deal with.
Every home requires maintenance, but certain locations are more prone to extra expenses due to weather, flora, or fauna.
Some red flags to consider might include:
- Nearby animals that might be destructive to foundations or landscaping
- Flood-prone areas, or areas that have poor drainage
- Certain bugs or vermin that have the potential to destroy wood
- Salty beach air that rusts air conditioning units faster than normal
- Tall trees that could pose threats in storms
- Invasive vegetative species that limit what else can grow
- Heat or cold conditions that require specialized insulation
Find a house that fits your needs
Avoid buyer’s remorse by prioritizing what’s important to you. Make a list of what is non-negotiable and a list of where you might be willing to compromise. Run your lists by your agent to make sure you’re being realistic within your price point and area.
Line up your financing
Getting a mortgage prequalification and preapproval helps to ensure you won’t be overextended financially.
There’s a difference between the two stages. Prequalification usually just means that a mortgage professional takes a look at your finances (assets, income, and other debt) and gives you an estimate of the loan amount you may be able to afford.
Preapproval, on the other hand, is typically a more official process where the lender requires more documentation of your bank accounts and also looks into your credit history. Pre-approval letters are usually good for 60 to 90 days, so don’t enter this stage until you’re serious about your home search.
It’s in your best interest to shop around for good mortgage rates and terms prior to getting pre-approved. Just because you’re preapproved by a certain lending institution doesn’t mean you’re required to go with that lender for your mortgage … but it certainly makes the process easier if you do that research on the front end rather than scrambling after the offer is accepted.
Ask for the seller’s disclosures
In many states, sellers are required to document and disclose any known issues with the house. This could include problems with the foundation, roof, systems, structure, and more.
Talk with your agent about the disclosures to determine what you should and shouldn’t accept in your particular situation. Disclosures can and should affect negotiations.
However, some states go by a caveat emptor, or “buyer beware,” rule when it comes to real estate, meaning the burden falls on the buyer to investigate the property. If you live in a caveat emptor state, your due diligence may need to include more specialized inspections (see below).
For more about the disclosure laws in your state, see our mandated real estate disclosure guide.
Review the CC&Rs
If you’re moving into an area with a homeowners association (HOA) or condo-owners association (COA), then there will be covenants, conditions, and restrictions (CC&Rs) that apply to the home. Read through these rules, regulations, and fees, and make sure you’re fine with them.
Some of the regulations that you might find on the CC&R documents include:
- Outside architecture and appearance
- Use of and behavior in common spaces (pool, fitness room, clubhouse, playground, etc.)
- Whether you can rent your home
- Noise and behaviors
- Legalities, dues, and assessments
Get an inspection
A home inspection is arguably the most important point of due diligence.
This is when a professional inspector will walk through the house and document any problems that they find. A typical home inspection should take between two and four hours, and buyers are usually allowed to be present. After the inspection, you’ll receive a detailed report along with a summary of any issues.
You and your real estate agent can then discuss whether or not the inspection changes your desire to purchase the home. Your agent will usually include an inspection contingency in your purchase offer, one that states you have the right to opt out of the purchase for inspection-related issues during the due diligence period.
In some cases, you might be able to ask the seller to make repairs in regards to the inspection. Other times, the seller might offer cash at closing to compensate for any repairs that you might need to make after you move in. In a strong seller’s market, the seller may refuse to pay for any repairs, passing the cost onto you.
When looking for an inspector, it’s best to check whether the inspector is licensed, since proper licensing is an indication of training, experience, and verified liability insurance. But not every state licenses inspectors, unfortunately. If that’s the case in your state, ask your real estate agent for a good referral.
Consider specialty inspections
General home inspectors can only find what they can see. If the inspector suspects that there could be unseen issues, they may recommend a specialty inspection. As the name implies, specialty inspectors are trained to go beyond the surface level and test for more specialized problems.
Some special inspections that you might consider include:
- Toxin inspection (radon, asbestos, mold)
- Environmental inspection (soil, lead paint, asbestos)
- Foundation inspections (cracks, stability)
- Roof inspection (for damage or age estimates)
- Plumbing inspection (pipes, well, septic)
- Electrical inspection (especially in older homes)
Get an appraisal
An appraisal is designed to determine the value of the home. A professional appraiser will compare the house to other nearby homes, then make adjustments for various house-specific features.
An appraisal is an important part of your due diligence, first of all, because your lender will require it if you’re getting a mortgage. But even if you plan to pay cash, an appraisal is in your best interest because it provides a more professional valuation.
This will help assure you that you’re getting a good deal on the house. If the appraisal comes in lower than your offer price, you can go back to the seller for further negotiations.
Order a survey
A survey is a map of your property that shows its boundary lines along with any easements. (Easements refer to someone else’s usage of the land.) Surveys are generally only required if you’re looking at a rural property or significant acreage. With larger properties, however, they can be important because the exact coordinates of the survey will be listed on the deed.
A survey won’t be required by most lenders if you are looking at a non-rural property in most states, instead they will rely on your title insurance. But on larger properties you may be required to get a survey to obtain financing and if there’s any discrepancy (for example, a neighbor’s fence encroaching on the property), then it might need to be resolved before you can close on your mortgage loan.
Understand any zoning laws
Ask your real estate agent to find out if there are any zoning laws that pertain to the property.
Sometimes zoning will prohibit certain types or numbers of structures, such as mobile homes or sheds. Sometimes zoning laws dictate rental capabilities or the types of animals you can have on the property. Sometimes zoning laws prohibit the parking of certain vehicles or trailers. Make sure the zoning requirements work for your lifestyle.
Conduct public research
Pagano says it’s important to check with two local government departments: the planning department, and the building and safety department.
The planning department will be able to tell you if there are establishments planned that could affect your home’s value (such as a jail or waste management facility).
The building and safety department will be able to tell you what kind of permits have been pulled for the property. Permits will show that any updates were done correctly. They will also show if there have been any fills or cuts in the land, which could be important if you plan to add on in the future.
Consult with a construction professional if you have any questions about the permits on the home.
Check the home’s flood zone status
Check to see if the house is located in a FEMA flood zone. You can do this by looking up the address on the documented FEMA maps. Most of the time, a FEMA flood zone is determined by elevation from sea level.
If the home is in a FEMA flood zone, you’ll need flood insurance. This is a separate policy that costs between $550 and $1350 per year on average, depending on location. Your insurance agent can help you obtain flood insurance, which is underwritten by FEMA.
Secure homeowners insurance
It’s best to get at least three quotes for homeowners insurance. Your real estate agent and other homeowners in the area may have recommendations.
When comparing insurance quotes, be sure that the coverage limits and deductible amounts match on each quote; that way, you can properly determine which insurance premium is a better value.
Talk with each insurance agent about what coverage options are best in your scenario. There may be certain natural disasters in your area that they recommend coverage for –– earthquakes, sinkholes, hurricanes, and so on –– which might require specialized terms.
But it’s also important not to be over-insured. Look at the dwelling coverage and make sure the replacement cost value seems appropriate. Replacement cost is usually higher than market value, since it figures in the possibility of rebuilding the house completely new from the ground up.
Consider the amount of your liability coverage
Your liability coverage is designed to protect you and your home in the event that someone sues you for injury. Given the cost of healthcare in the United States, obtaining a reasonable amount of liability coverage should definitely be a part of your due diligence to ensure you feel it’s sufficient to cover potential claims.
Talk to your insurance agent about the liability coverage that’s best for your situation. Protect your investment!
Get yourself some title insurance
Title insurance should be a top priority as you’re doing your due diligence. The title company will conduct a title review, which is designed to uncover any heirs or outstanding liens before you purchase the property.
But a title review is not always comprehensive. If the title company misses something, title insurance protects you from fighting the ensuing legal battle.
Pagano encourages all her buyers to take their due diligence seriously.
“It’s better to take the time now than to have regrets later. A house isn’t something you can just return to the store!”
Remember, you don’t have to go through this due diligence process alone. Your real estate agent is there to help every step of the way. Once you’ve completed your due diligence, you can rest assured that you’ve done everything possible to make your home purchase a success.
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What does due diligence mean in residential real estate purchases? We’ll guide you through the process and provide a printable checklist for homebuyers.HomeLight Blog