There are many steps to buying a house, but perhaps the most important is the stage known as due diligence.
The due diligence period is when you verify its value, perform a home inspection, and make sure everything checks out.
In this guide, I will go over the due diligence process such as...
- home inspection
- appraisal
- title search (and insurance)
- homeowner's insurance
- condo docs
Let's get started with this guide!
What is Real Estate Due Diligence?
After you have an accepted offer on a home, this is when the due diligence period typically starts --- an agreed upon time to verify that you actually want to buy the home.
How Long Is The Due Diligence Period?
The due diligence period can be as short as a few days, or it can be as long as several weeks. This is when you make sure everything checks out in regards to the homes value. According to the North Carolina Real Estate Commission, in today's market after the 2008 banking crisis, it usually isn't feasible to have a very short buyer due diligence period.
Most real estate contracts will have at least one contingency which is simply an agreement in the purchase contract that allows you to walk away from the purchase (and get your deposit back) if something doesn't check out. The most common contingencies are for the home inspection, appraisal, and clear title.
The property due diligence period can be a complicated (and stressful) part of buying a house, especially if you don't have the help of a real estate agent. There are many moving parts, and having someone on your side to help you succeed such as an experienced agent is invaluable. But even if you are buying a home on your own, there are only a few fundamental aspects of real estate due diligence.
In my opinion, real estate due diligence has at least three important tasks such as...
The Home Inspection
As a home inspector, it would be virtual negligence if I didn't always recommend getting a home inspection done --- you can call me a bit biased. I have all of my horror stories of homes that had defective plumbing, outdated wiring, busted sewer pipes, carbon monoxide hazards, and loads of other nightmares.
What If I Find Defects During The Home Inspection?
As home inspectors, we generally find long lists of repairable items --- sometimes one hundred or more. Many of these items are easily repairable such as a loose toilet, sticking doors, and problematic windows (such as falling down when opened).
Usually, at the end of the inspection, I give my clients my personal summary of what I think are the most important items --- frequently ranging from 2 to 7 items.
As long as you actually inserted a home inspection contingency in your offer, then you can request the Seller to repair these items or to lower the price sufficiently. If the Seller refuses, then you have the right to walk away from the home and get your deposit back.
Defects Versus Deficiencies
When negotiating with the Seller, it is important to understand the difference between defects and deficiencies. One of the most common things I tell my buyers is that the HVAC system is very old, and it may need to be replaced in the next few years --- and that they should prepare for that possibility.
Now, the A/C may be working perfectly fine when I test it during the home inspection. It may not be very energy efficient and it may be dirty, but as long as it's working, then it isn't a defect, it's a deficiency.
You cannot legally ask the Seller to replace something that is actually working even if it's extremely old.
Other frequently mentioned items in my inspection reports are that it is "recommended for the buyer to upgrade to thermally insulated windows" because it is an old house with single-paned wood windows. Again, it's a deficiency and not a defect. You can still clearly live in a home with poor insulation or with single paned windows.
Read Also: Tips And Traps When Buying A Home (From A Licensed Inspector)
Examples of Major Home Defects of $10,000 Or More...
The funny thing about homes is that when you look closely at all of the details, you sometimes find very large problems --- things that most people wouldn't see. Home inspectors have specialized tools such as moisture meters, outlet testers, and infrared cameras.
Here are two examples of home issues that the average person would overlook...
1. A Defective Brick Front Wall
Even though most brick walls aren't structural (they just hold up their own weight) and act similar to vinyl siding --- they can still be very expensive to repair. I inspected a townhome last year when I noticed some cracking in the front brick wall, right above the garage door.
I also detected moisture intrusion on the inside because the cracking allowed in water. The brick wall also was noticeably sloping right above the garage door. Anyways, I recommended a structural engineer, and contractor estimates to repair the brick totaled around $25,000.
2. Defective Plumbing Called Polybutylene
Sometimes entire systems will have to be replaced. Recently I did a home inspection when I discovered a defective type of water piping known as polybutylene (or poly for short).
This water piping was installed from about 1978 to 1995 because it was much cheaper than copper (prices were sky high in the 80's) and also much easier to install.
Most of this piping has a bluish-gray color and is easily distinguishable from copper, PEX, or CPVC. Frequently, the poly designation of PB-2110 is stamped somewhere on the pipe.
What many people don't realize is that the main water line (out to the street) can also be made out of polybutylene and is a big ticking time bomb. Most of the time when I inspect a home that once had poly (they replaced it all with PEX), I notice that there are numerous old water stains on the ceiling --- signs of how problematic poly can be.
The cost I estimated for this house to replace all of the domestic water piping AND the main water line was in excess of $15,000.
Appraisal
Hiring an appraiser is an important part of verifying the home's value. Using free tools such as Zillow can only go so far in determining the value of a home.
Do you really want to guess the value when so much is at stake?
Appraisers frequently have access to recent sales that aren't even yet public record. They also tend to have key insights about neighborhood values and trends that most people aren't privy too.
Besides the current value, the appraisal report also mentions whether values are going up or down in your subdivision. Personally, I want to know if my home is likely to go up or down in value next year --- even if it's just an estimate.
If you are working with a lender or mortgage broker, then it is highly likely that they will order the appraisal themselves from their list of approved appraisers --- so don't even try to hire your own.
However, if you are working with a broker, you may be able to get the appraisal ordered at the beginning of the property due diligence period, which may save you a week or more in getting to closing. Most real estate closings are held up because the appraisal report hasn't been finished yet.
Read Also: Should I Get A Mold Inspection When Buying A House? (My Top Tips)
The Title Search
When buying a home, there are important steps in the real estate due diligence process that have nothing to do with the physical property. One of these key items is the title search.
The title is the ownership of the property, and a title search verifies the current ownership, and makes sure that it is free from conflicts, claims, and disputes.
The lender will require a title search is performed on the property in order to protect their investment (as well as protect your ownership).
Title Insurance
The title search is performed prior to obtaining title insurance. If the title is deemed clear, then title insurance will be acquired. Title insurance will cover any future legal expenses to defend or clear the title from third party claims that may arise in the future. Let's say Uncle Bob shows up a few years later and says that he owns part of the property. Title insurance will cover all legal fees to defend or settle such a claim.
Pro Tip: If you are buying a FSBO (for sale by owner) investment property, you may want to order the title search as the first thing you do --- especially before you give the seller a large deposit. Typically the title search is in the $50 to $150 range from a title company.
What Are Due Diligence Docs When Buying A Condo (Or Dealing With HOA)?
It's very important that as a buyer you obtain a copy of the condo or homeowners association CC&R's (covenants, conditions, and restrictions). The condo or HOA docs will inform you of your rights as an owner and things you can't do.
These documents may spell out what color you paint your home, if you will be able to rent out the home, or how many cars you can park.
Many states have laws regulating how long it takes for you to get a copy of the docs, and you may even be able to void the purchase contract if you don't speedily get a copy.
Conclusion
The due diligence period when buying a home can be a frightening and stressful process, but if you find some trusted and qualified professionals to help you, gather the facts can be a breeze.
The right home inspector will find any major issues with the home. The right mortgage broker/lender will help you secure the loan. The right title company will help you get clear title. And the right realtor will help you put it all together and get to closing. (Here is a valuable mortgage closing checklist.)
Just make sure you put together a good team, and look objectively (as possible) at the home you wish to buy.
Buying a home is like falling in love, you sometimes don't see any possible negatives that are right in front of you. I see it all the time during home inspections, people are shocked at what I find that they didn't see.
FYI, it's always a good idea to physically attend your home inspection --- it will be enlightening for you, I promise.