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Buying 101: Due Diligence

Buying 101: Due Diligence
March 11, 2019 Allison Andrews

One of the aspects of buying and selling that is a real tripping hazard for residential home sales in our region is the “Due Diligence” period. Let me back up a minute. My last post was about buying 101.  My goal was to cover the basics of home buying, but as I was writing the post I realized how many parts and pieces there are to cover. There’s really nothing “basic” about it.  Whether you are a first time home buyer or a seasoned investor, each sale is different and has it’s own complexities. So I thought you deserved to get a little more insight into a few areas.

I’ll tackle ‘Due Diligence’ first. Que the impending doom music.  Let me show you what I mean. I pulled these definitions directly from the Standard Offer to Purchase and Contract form.

                    “Due Diligence”: Buyer’s opportunity to investigate the Property and the transaction contemplated by this Contract, including but not necessarily limited to the matters described in Paragraph 4 below, to decide whether Buyer, in Buyer’s sole discretion, will proceed with or terminate the transaction.

                “Due Diligence Fee”: A negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer’s right to terminate the Contract for any reason or no reason during the Due Diligence Period…

Buyer’s, there are a couple of facts about Due Diligence are critical for you to understand. 

  1.   Sellers are not obligated to make any repairs or satisfy any requests made by buyers.  
  2.   Due Diligence funds are paid by buyer and are non-refundable. 

Buyer’s often think if they are unsatisfied with the condition of the home after inspections they are due a refund of their Due Diligence fee.  That is not the case.  The Due Diligence amount goes directly to the seller for the buyer’s right to investigate the home and walk away from the sale for any reason or no reason at all during the Due Diligence period.

There is no set or standard amount the buyer will pay for due diligence to the seller. The amount is negotiated between the two parties.  Every real estate broker has a different opinion of what this amount should be.  I counsel my clients to never offer below $500.00.  The price is typically relative to the amount of the contract price.   If you are purchasing a 200k home $500 is generous.  If you are purchasing a 500k home, $1000 would be more appropriate. 

Price isn’t the only thing negotiated. So is the length of the Due Diligence period.  I counsel my buyers to ask for 30 days, but settle on 21 days of Due Diligence, if the seller has an issue.

Buyer’s once you are under contract on a home, and have negotiated the due diligence fee and time period, the clock starts ticking. 

My buyer’s and I get to work quickly with the following tasks.

1.  Let your lender know you are under contract and send your lender the fully signed offer to purchase and contract.  This trigger’s their process first and foremost; Ordering the appraisal  (we want the appraisal back before the end of Due Diligence) 

2.  Schedule Inspections:  General home inspection and WDIR (Wood Destroying Insect Report) or more commonly known as “Termite Inspection”

3. Choose your closing official and/or attorney.  Your closing attorney will schedule closing and begin her duties around investigating Title and preparing the deed.  They will also start communicating with all parties including your lender on preparing closing documents.

4.  Choose your home owner’s insurance. 

5.  Decide if you would like to order a survey.  A survey is optional but very good to have.  It is an additional cost to buyer.

It’s ALWAYS a give and take with purchasing a home. 

We would all like a perfect move-in ready home.  However, the only way to avoid any repairs or repair negotiations is to build your own home from scratch.  I don’t mean to sound cynical just realistic. 

Buyer’s you should fully understand the process before going under contract on a home.  This will make your home buying process much more empowering for you.  5 Points Realty just had some killer classes helping make the home buying experience easier. Check out the FB page so you don’t miss another class!