Due Diligence
Due diligence is the investigation period in a real estate transaction during which buyers thoroughly examine the property, review documents, and verify all aspects of the purchase before finalizing the deal.
Exam Tip
Due diligence = buyer investigation period. Includes inspections, title search, surveys. Buyer can cancel for issues found during this period.
What is Due Diligence?
Due diligence is the comprehensive research and investigation buyers conduct before completing a real estate transaction. This period allows buyers to verify property condition, legal status, and all material facts before they are legally bound to purchase.
Due Diligence Activities
| Category | Activities |
|---|---|
| Physical Inspection | Home inspection, pest inspection, roof inspection |
| Environmental | Environmental assessment, soil testing |
| Legal Review | Title search, survey, deed review |
| Financial | Appraisal, rental history, operating expenses |
| Regulatory | Zoning verification, permit history, code compliance |
Due Diligence Timeline
| Phase | Typical Duration |
|---|---|
| Inspection Period | 7-14 days |
| Title Review | 5-10 days |
| Survey | 7-10 days |
| Environmental | 14-30 days |
| Overall Due Diligence | 14-45 days (varies by state) |
Physical Due Diligence
| Inspection Type | What It Covers |
|---|---|
| General Home Inspection | Structure, systems, components |
| Pest/Termite | Wood-destroying organisms |
| Roof | Condition, remaining life |
| HVAC | Heating and cooling systems |
| Sewer/Septic | Sewer line or septic system |
| Radon | Radon gas levels |
| Mold | Mold presence and type |
Legal Due Diligence
| Item | Purpose |
|---|---|
| Title Search | Verify ownership, find liens |
| Survey | Confirm boundaries, encroachments |
| Deed Review | Check restrictions, easements |
| HOA Documents | Review rules, financials, reserves |
| Permit History | Verify work was permitted |
Financial Due Diligence (Investment Properties)
| Analysis | Information Gathered |
|---|---|
| Rent Roll | Current tenant income |
| Operating Expenses | Actual costs to operate |
| Lease Review | Terms, expirations, options |
| Tax Records | Property tax history |
| Insurance Costs | Current coverage and premiums |
Due Diligence Fee
| State Practice | Description |
|---|---|
| Due Diligence Fee | Non-refundable fee paid to seller (NC, some states) |
| Earnest Money | Refundable deposit during contingency period |
| Option Fee | Fee for option period (TX) |
Ending Due Diligence
| Outcome | Result |
|---|---|
| Satisfied | Proceed to closing |
| Issues Found | Negotiate repairs/credits or cancel |
| Major Problems | Cancel and get earnest money back |
| Deadline Passed | Contingencies may be waived |
Exam Alert
Due diligence is the buyer's investigation period. Includes inspections, title review, surveys, and document review. Earnest money is typically refundable if buyer cancels during due diligence period for valid reasons specified in contract.
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Related Terms
Contingency
Real EstateA contingency is a condition or clause in a real estate contract that must be satisfied before the transaction can close, allowing buyers to cancel without penalty if the condition is not met.
Earnest Money
Real EstateEarnest money is a deposit made by a buyer to demonstrate serious intent to purchase a property, typically held in escrow until closing.
Appraisal
Real EstateAn appraisal is a professional assessment of a property's market value, typically required by lenders before approving a mortgage to ensure the loan amount is appropriate.