When you’re buying a home for the first time, you may encounter certain terms and phrases that you’ve never heard before. Once you’ve made an offer and entered into a contract with a seller, “due diligence” is one you’ll be introduced to. Due diligence is something every buyer needs to understand. Here’s a quick guide for what to expect.
A financial advisor can help you create a financial plan for your home buying goals.
What Is Due Diligence?
Due diligence refers to the period of time that begins after a home offer is accepted by a home seller and ends before the closing. The length of the due diligence period is typically negotiable and it can be extended as long as the buyer and seller agree on a new deadline.
The due diligence period gives the homebuyer the opportunity to identify any potential issues or problems with the home that could compromise the purchase. It also gives the buyer the chance to back out of the transaction if certain contingencies aren’t met.
What Are Homebuyers Responsible For?
There are several things that homebuyers are supposed to do during the due diligence period. You’ll need to have your property appraised in order to determine its fair market value. The appraisal is what the lender uses to gauge whether the amount of money that the buyer wants to borrow is appropriate.
You’ll need to have the home inspected inside and out as well. And you’ll need a separate pest inspection. While the appraisal fee is sometimes required to be paid up front, you may be able to pay that fee and the inspection fees at closing. If the home has a septic tank, it’s a good idea to have that inspected during the due diligence period, too.
During the due diligence period, it’s also important to take the time to do some additional research on the home and the area you’ll be moving to. For example, you could drive through the neighborhood to get a feel for what traffic conditions are like or check local crime statistics. It might also be a good idea to scope out the neighbors to find out what they’re like.
If there’s a homeowners association, it’s important to understand the way the fees are structured and know the rules that HOA members are expected to follow. Finally, you may want to consider having the property surveyed if there isn’t a survey on record. That way you’ll find out about any issues that could be problematic later on.
What Happens if You Change Your Mind?
Once the due diligence period ends, you’ll lose some of your protections. Generally, if you decide to back out of the purchase after the due diligence period ends, you won’t be able to recover your earnest money unless you can prove that the seller covered up a serious home defect or property title issue.
Besides keeping your earnest money deposit, a seller can take legal action against you to recover any money that he or she loses by cancelling the home sale. In extreme situations, a seller can ask a judge to force a buyer to go through with a sale.
Bottom Line
If you’re planning to buy a home, it’s best to take the due diligence period and its requirements very seriously. Otherwise, you could create a mess for yourself that could be difficult to get out of.
Tips for Homebuyers
- If you’re interested in saving up to buy a home, a financial advisor can help you create a financial plan.SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free calculator can help you estimate how much home you can afford.
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FAQs
Due diligence refers to the period of time that begins after a home offer is accepted by a home seller and ends before the closing. The length of the due diligence period is typically negotiable and it can be extended as long as the buyer and seller agree on a new deadline.
What is included in due diligence when buying a house? ›
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.
Can a buyer back out after a due diligence period? ›
Once the due diligence period ends, the buyer cannot back out of the contract (except under a different, applicable contingency – financing or appraisal, for instance). If they back out prior to closing and no other contingency gets them out of the contract, they lose their earnest money.
Can you extend the due diligence period? ›
The Due Diligence Period may be extended if mutually agreed to in writing by the Parties. All provisions of this Agreement relating to the Due Diligence Period shall also apply to any extensions thereof.
How long should a due diligence period be? ›
In California, you have an average of 17 days. But, some agreements can be customized if you and the seller agree to move ahead at a slower or faster pace with the purchase. Some agreements may call for much longer periods to complete due diligence depending on the complexity of the purchase.
What is a due diligence checklist? ›
A due diligence checklist is a way to analyze a company that you are acquiring through a sale or merger. In the context of an M&A transaction, “due diligence” describes a thorough and methodical investigation and assessment.
Can I walk away during due diligence? ›
Be sure you know what circ*mstances allow you to walk away from a purchase—such as a home inspection that uncovers a significant problem that the seller is unwilling to address, or the buying party is unable to obtain financing for a mortgage. Also, discuss the implications of what you agree to in the contract.
What is average due diligence fee in NC? ›
The due diligence fee is a negotiable (by your realtor) and is typically between $500 and $2000, depending on the market competition and on the purchase price of the home. Just like the earnest money deposit discussed in our other blogs, a higher due diligence fee makes your offer more enticing to a seller.
Who gets earnest money when buyers back out? ›
The purpose of earnest money is to provide the seller with compensation in the event that the buyer backs out of the deal through no fault of the seller and in violation of the agreements in the purchase contract. If that happens, the seller gets to keep the earnest money.
Can you cancel for any reason during due diligence? ›
It depends on the state and the terms of the agreement you signed. Some states like TN require you to “have cause” in order to cancel a Purchase & Sale Agreement during due diligence. Other sates like GA, have no such requirement and you can cancel for any reason or no reason during due diligence.
If, after the inspections, the buyer is still interested in moving forward with the sale, negotiations at this point can come in the form of repairs, seller-paid closing cost credits, and/or a price reduction.
What is the time limit for due diligence? ›
Due Diligence. Simply, a time frame allotted to a buyer for studying a purchase. Generally, there is no obligation to proceed if something untoward is discovered. Also referred to as a contingency period, a “free look”, or in some cases an option - these 30-75 day periods are chock full of action.
Is appraisal done during due diligence? ›
There are several things that homebuyers are supposed to do during the due diligence period. You'll need to have your property appraised in order to determine its fair market value. The appraisal is what the lender uses to gauge whether the amount of money that the buyer wants to borrow is appropriate.
What is the timeline for due diligence? ›
Timeline and Costs for the Due Diligence Process
A typical due diligence process typically takes between 4 and 20 weeks, with an imperfectly positive correlation between due diligence time and transaction size. In terms of costs, the best way to reduce costs is to invest in a virtual data room.
What happens when due diligence ends? ›
If the buyer defaults or decides against proceeding with the transaction after the expiration of the due diligence period, the deposit is typically released to the seller and forfeited by the buyer.
What happens if you don't do due diligence? ›
Failure to provide due diligence can result in an unjust outcome for the case and may require a retrial to resolve the matter, as well as a legal malpractice claim to recover any damages the victim has suffered.
What is included in a due diligence check? ›
Actions you will take during due diligence investigations include reviewing: contracts – for the sale of the business, existing agreements between the business and staff and suppliers, and partner agreements. records – income, profit and loss statements, and tax returns.
What does due diligence include? ›
A due diligence check involves careful investigation of the economic, legal, fiscal and financial circ*mstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion.
How much is the due diligence fee in NC? ›
The due diligence fee is a negotiable (by your realtor) and is typically between $500 and $2000, depending on the market competition and on the purchase price of the home. Just like the earnest money deposit discussed in our other blogs, a higher due diligence fee makes your offer more enticing to a seller.
How much due diligence should I offer? ›
Due diligence money is typically between five hundred and two thousand dollars, whereas the earnest fee is a percentage of the purchase price of the home. In cases where there are multiple offers on a home, some sellers will consider the due diligence amount in deciding which bid should win the war.
