Staying on Top of the Transaction
A real estate due diligence checklist is also a closing checklist. Therefore, use it to keep on top of each phase of a real estate transaction. The checklist is also a major part of the home buying process, giving you, as the buyer, a chance to work with a lender and have the property inspected.
Contingency Periods in California
Due diligence provides the homebuyer with time to see if a property meets with his or her expectations. In California, a due diligence or contingency period is allowed for sellers to deliver disclosures in seven days. The buyer has 17 days to complete any inspections and apply for financing. At the end of the 17 days, the contingency must be released by the buyer to proceed with the real estate sale. Otherwise, he or she must cancel the purchase.
During the due-diligence period, a purchaser may order inspections, research zoning or permits, review environmental factors, or shop for insurance. A pest inspection is normally ordered as well as a home inspection. At the end of due diligence, the buyer can negotiate any repairs with the seller as well as credits. He or she may also accept the current condition of the property or cancel the sale.
Asking for an Extension
If a homebuyer is unable to complete real estate due diligence within the period signified in the real estate contract, he or she may ask for an extension from the seller. In response, the seller does not have to agree to an extension. Instead, he or she may request that the buyer go ahead with the purchase without the required data.
Due diligence is designed to safeguard the seller and buyer, by permitting both parties to engage in the discovery of the facts. Once the contingencies are removed, the parties can confidently proceed with the closing.
Again, due diligence permits the buyer to work with his or her lender. You should already be pre-approved for financing at this point. Therefore, if a lender has any questions about a property, you can use the due diligence process to answer those inquiries.
Reviewing a Property’s History
During due diligence, you can shop for homeowners insurance, as noted, as well. If the coverage is higher than anticipated, its gives you an opportunity to change your mind. In addition, due diligence enables you to review a property’s history. For example, you can see if the real estate was once a foreclosure or if it has ever been flipped. Knowing this information can help you better understand a seller’s motivation to sell.
Are you concerned with crime? If so, due diligence permits you to research the surrounding community. As indicated, you can have the home inspected for defects too. Determine potential hazards environmentally as well. These hazards may in include mold growth or the presence of radon in the home.
Reviewing the Potential for a Commercial Property
Due diligence makes you cognizant of the state of a property before it is purchased. Therefore, real estate due diligence is particularly helpful in the purchase of commercial real estate because it allows developers to assess their options. For example, performing due diligence allows an investor to see what fits on a property after considering the following:
- Building setbacks
- Landscape requirements
- Taking Time Out to Assess a Property
Due diligence also enables you to calculate the leasable area, if applicable. Additionally, you need to assess what it will cost to build. What kind of site improvements need to be made in order to develop the project? The zoning ordinances can also affect the cost of the landscaping and buildings.
By including a general contractor in the process, you can obtain valuable feedback about costs early in the game. Performing due diligence also permits the developer to review any encumbrances.
Obtaining a Commercial Survey
You should obtain a current title report with listed exceptions as well. In addition, a professional surveyor should be contacted to prepare an ALTA (American Land Title Association) survey to overview the site conditions, including the encumbrances or terrain.
When to Obtain a Commercial Survey
A commercial survey should be performed, as a part of due diligence, anytime the following occurs:
- Commercial real estate is bought or sold
- When vacant land is purchased
- When you need to find out more details about a piece of land
An ALTA survey is detailed as it shows all the structures on a property, including the boundaries, the sites for improvement, and all structures. Fences, roads, and utility lines are also featured in the report.
Following a Due Diligence Checklist
When a due diligence checklist is followed, it typically lists each action, the date for the action, and the party responsible for the activity. Any comments are included next to the activity. For example, under the classification of “Acquisitions and Documents,” a signed letter of intent may be listed.
Further down the list, due diligence may include obtaining and reviewing a purchase contract or delivering the contract into escrow. Under the classification of “Title, Survey, and Zoning,” due diligence may include the selection of a title company or the ordering of an updated title commitment.