You make an offer to the house and it has been accepted, now the due diligence period begins. In real estate, due diligence period is the time between accepted offers and closures. You can schedule inspections, check titles, secure ratings, and see red flags that may affect your purchase decision.
Whether you’re buying a home in Sarasota, Florida, Wyckoff, New Jersey, or Carrollton, Texas, this Redfin guide explains what due diligence means for buyers, what usually happens in this phase.
What is real estate due diligence?
During a real estate transaction, after the offer is accepted, a due diligence period occurs before closing. This time frame gives buyers permission to thoroughly inspect the property. It is an important period to verify the condition of your property, meet expectations, and meet the funding requirements set by your lender.
In some states, buyers can also pay due diligence money. This is a non-refundable fee paid directly to the seller in exchange for this inspection window. It’s not necessary everywhere, but it’s an important part of the process in a particular market and is separate from serious money deposits.
What is the difference between money in due diligence and serious money?
Both due diligence and serious money are part of the home buying process, but they serve different purposes and are handled differently.
Due diligence money is usually paid to a non-refundable seller and compensates you for leaving the market during inspection. This applies only in certain states. Earning Money is a disadvantaged deposit held in escrow that can be applied to closing costs or down payments. Usually, refunds are possible if the buyer retreat for justification such as inspection or funding issues.
What will happen to the due diligence period?
When buying a home, it is important to gather all the details you need to make a confident decision. During the due diligence period, buyers are allowed to have a certain amount of time, usually outlined in the purchase agreement, before completing a sale.
Here’s what you can expect to happen at this stage:
1. Home inspection
Buyers will hire a licensed inspector to assess the condition of the home and check for structural issues, roof damage, plumbing issues, electrical safety and more. Even if the lender doesn’t need it, it’s wise to hire a licensed home inspector to catch any potential issues.
If a home inspection reveals a major issue, the buyer can request repairs, negotiate credits, or even drive away, according to the contract.
2. Home rating
If the buyer is funding the home, the lender usually requires a home valuation so that the value of the home supports the loan amount. The home assessment process is carried out by licensed third-party experts who assess the market value of the property based on nearby conditions, features, upgrades, and equivalent homes. If the rating is lower than the purchase price, it can lead to renegotiation or valuation gap issues.
If there is a lack of ratings, the buyer has a choice.
Renegotiate with the seller to lower the purchase price. Pay the difference in self-payment. If the contract allows, the contract will terminate. Some buyers use valuation gap clauses to specify how much they pay beyond the valuation amount.
>>Read: What is a house evaluation? How the process works
3. Title search and insurance
An in-depth title search is essential to identify potential property ownership issues. This includes verifying that the seller legally owns the property and identifying any liens, liens, or legal claims.
Title insurance provides an extra layer of security and protects buyers from financial losses due to unexpected title flaws that may later surface, such as private heirs and errors in public records.
4. Property survey
During due diligence, licensed real estate surveyors are often brought in to define the exact legal boundaries of the property. Surveyors measure land, mark property lines, and map structures, easements, and locations of infringement.
This detailed report will help you identify boundary or land issues that may cause problems later. For example, the investigation may reveal that neighbors’ fences can break into property and limit easements that can be built.
5. Seller disclosure review
Sellers should most often provide written disclosure detailing known issues with the property. Buyers will review these documents to learn about existing conditions and issues. The specific information contained varies by federal, state, and local law.
This review usually includes:
Disclosure Forms: These forms detail known defects or properties issues, such as leaks, structural problems, mechanical problems, and pest diseases. Asset History: Information about past repairs, renovations, or insurance claims related to property. Property boundaries: Documents or investigations that outline the exact property lines can help identify infringement, easements, or disputes with nearby properties. Environmental Hazards: Disclosures related to potential environmental issues such as lead-based paints and asbestos. Neighborhood Concerns: Known issues with the development of neighbors, noise complaints, or local communities that may affect property.
6. Homeowners Association (HOA) Rules
HOAS implements community rules for certain rules in a particular area or neighborhood to ensure the safety and protection of residents. If the property is part of the Homeowners Association, you will receive a document that outlines the rules, fees and liability for the HOA during the due diligence period. These rules can affect how you use and modify your home, so it is important to check carefully.
General HOA regulations may include:
External paint color or additional restrictions on home landscaping requirements or restrictions on short-term rentals or regulations regarding pet restrictions or noise regulations for your home monthly or community maintenance fees annual fee
7. Zoning rules
Zoning regulations may determine how you use the property and may limit building heights, additional or from home business. During due diligence, it is wise to ensure that zoning matches the property’s plan. For example, if you want to add rental units or build an independent garage, local zoning laws will determine whether it is permitted or not.
8. Homeowner Insurance
Homeowners don’t need to legally insured, but most lenders need it before approving your loan. Insurance costs and coverage vary depending on the location, age and condition of your home. For example, if your home is in a wildfire-prone area, or if you have features like an old electrical system or a separate garage, you may need additional cover beyond the standard policy to be fully protected.
9. Final decision
After completing the inspection and investigation, the buyer decides whether to advance the terms of purchase, renegotiate the terms, or cancel the contract without penalty (if still within the due diligence window).
How long is the due diligence period?
Due diligence periods usually last between 7 and 14 days, but the exact length depends on the purchase agreement and local real estate customs. In some states, this period is clearly defined by law, but in other periods it is negotiable between the buyer and seller.
For example, in North Carolina, due diligence periods are the formally defined portion of a contract, typically lasting 14-21 days, giving buyers time to complete tests, evaluations and other studies. In contrast, California calls this the period of testing emergency. This is often set for 17 days unless adjusted by the contract.
How to prepare for the due diligence period
Preparing for due diligence will help you move quickly and confidently once the offer is accepted. Here’s how to set yourself up for success:
Line up your team early: Before accepting your offer, find reliable home inspectors, surveyors and other professionals you may need. This allows you to schedule immediately during your due diligence. Review important documents in advance: Take your time to look at seller disclosures, HOA guidelines, and local zoning rules to avoid being caught off guard later. Understand important deadlines: Know how long your due diligence period lasts and mark important dates on your calendar to get you on track. Prepare your finances: Have funds for due diligence fees, serious money deposits, potential repairs or credits. Create a checklist: Create a personalized list of inspection and research tasks based on priorities and property types. Communicate with agents: Keep an open line of communications to help Redfin agents coordinate, answer questions and defend.
Real Estate Due Diligence FAQ
1. Do you need due diligence when buying a home?
2. Can I skip the due diligence process?
You can abandon it, but it is dangerous. Skipping due diligence means waiving protections for key buyers, including the right to inspect or return home due to serious issues.
3. How long is the due diligence period? Is it negotiable?
Yes, timelines are often negotiable between buyers and sellers. Some states have standard time frames, which help agents set the right conditions.
4. What happens if a problem occurs during the inspection?
You can negotiate repairs and request credit. In some cases, you may choose to back out, especially if the contract is permitted.
5. What happens if I miss the deadline or want to back out later?
If the deadline is not enough, it may cost you serious money. Once due diligence is over, the backout can have financial results.
6. Will you get back your due diligence money?
Due diligence money is usually not refundable as it indicates that you are taking your purchase seriously. However, if you experience any major issues during the inspection, depending on your contract, you can negotiate that it will be reclaimed or applied to your purchase. Always check your contract carefully.
