Buying a Home Part 2: Due Diligence
By Lorri Gifford
Last month we explored the steps that needed to take place before making an offer on a house. So, now let’s continue from the space of finding something that you really REALLY like.
Before I continue however I want to address the importance of nonattachment at this point. Make an offer on the house based on an amount that fits within your loan approval amount and one that you feel good about. Also, view your new potential home with excitement and also a bit of non-attachment. It is not until you have made your offer and gone through the next phase, called the due-diligence phase, that you will truly know if this is the house for you. This month we will once again continue our journey with the help of Sandy McCall, Broker/Realtor/Owner at Southern Life Realty in Asheville.
“The awakened sages call a person wise when all his undertakings are free from anxiety about results” – Krisna from The Bhagavad Gita.
The due diligence period is a valuable time period for buyers. It is a time to investigate and act on any concerns they have about the property before closing. The due diligence period helps to protect their interests. The Due diligence period gives you an opportunity to do your inspections, loan application, an appraisal, get a survey done, or investigate anything else that is important in your decision making process.
It’s important to remember that a Real Estate contract is a legal and binding contract. That is why the Due diligence period is important to a buyer. During the Due diligence period you can get out of the contract for any or no reason.
Electing to have a Due diligence period is built into the state contract. When writing your offer, you can choose the time frame that suits you and the work you need to do to complete your due diligence.
In the case of an “as is sale” (the seller is selling the property “as is”, no repairs, no additions) Due diligence is still important. Even if it is an “as is” sale, you can still get inspections and still exercise your right to get out of the contract.
THE ONLY EXCEPTION “MAY” BE IN THE CASE OF FORECLOSURES. You may not have the same options with foreclosures so make sure you know what you are signing. Most times the lender/seller will add addenda to the state contract that your agent will prepare. THESE ADDENDA WILL TRUMP THE STATE CONTRACT. OCCASIONALLY, THESE ADDENDA DO NOT ALLOW YOU TO GET OUT OF THE CONTRACT FOR ANY REASON, SO MAKE SURE YOU KNOW WHAT YOU ARE SIGNING.
When you make the offer you state the amount of time you would like for your Due diligence period. Time is of the essence with Due diligence, so make sure you do your work, ask for an extension, OR GET OUT OF THE CONTRACT BEFORE THE TIME PERIOD ENDS. The seller is not obligated to extend the Due diligence period, yet many will to make the deal work. Whatever you & the seller agree to, time is of the essence. Any renegotiation needs to happen before Due diligence ends.
Due diligence time frame is also something that may become part of the negotiation with the seller. i.e. seller wants to close sooner and you want to close later. If you strive to make this a win-win, everyone will likely be happier and move through the process more easily.
Some buyers opt to offer a Due diligence fee. Due diligence fee: Money paid directly to seller at the time the offer is executed. It is non-refundable yet, at the closing the buyer will get credit for it. If you don’t close, you lose the money. The Due diligence fee is a way for the buyer to sweeten the deal. Ex. Multiple offers, buyer wants more time for Due diligence, if the buyer offers a really low price.
REMEMBER, A REAL ESTATE CONTRACT IS A LEGAL, BINDING CONTRACT.
“Attempting to develop a piece of land without doing the appropriate due diligence can lead to unexpected surprises during the project. Failing to do so is one of the main reason as to why companies can go bankrupt after the project has commenced.” – Zeng Jun
Also, it is important to note that a Due diligence fee is NOT THE SAME AS EARNEST MONEY. An earnest money deposit is a deposit that is made to show the buyer that you are earnest with your offer. Earnest money can be re-claimed by the buyer if they walk away during the Due diligence period. The seller retains the deposit if the buyer changes their mind after the Due diligence period closes.
Ok, so you understand the importance of a Due diligence period and the difference between Due diligence fee and earnest money … Now what?
Well now it’s time to get crackin’ on what needs to be done. I am going to assume that your loan has already been pre-approved and you have sent the pre-approval to the sellers agent even if they haven’t asked for it – it makes you look better in the eyes of the seller.
Once the offer is made and the loan process begins an appraisal is ordered by the lender. Appraisers are chosen by an independent company and not by the buyer or the seller.
While that process is starting it is time to get your inspections done. Your realtor can order them for you. Unless this has been otherwise stipulated in your offer to buy the house, you pay for all inspections. You can choose your own inspectors or take recommendations from your realtor, family or friends. Do inspections right away and in an order that gives you the information you need. Prioritize those needs with your realtor. If you order a home inspection (which can include water testing and radon testing), a Home inspector may recommend further inspections like an engineer or a chimney inspector. It is important that you make sure you have enough time to complete them.
By law, Home inspectors are only required to do “representative” checks, which means he/she will not check each and every item. So, when choosing a home inspector it is good to have an inspector who checks every outlet, faucet and
window instead of representative checks. Because you are paying for this inspection, you will want the best information possible. Other inspections that you will want to have done are a pest inspection and possibly a septic inspection (if you are not on the city water system).
As a buyer it is important for you to do your part. Be there for the inspections or available as soon asthe written reports are ready because time is of the essence and there findings could affect your decision to buy or not to buy. If you are satisfied with the inspection results, move forward.
If Not, you may want to renegotiate with the seller or back out of the contract before Due diligence is up. Get a written report from each inspector. Get written reports with signatures and the address of the property on them. This can help in renegotiations.
When considering whether or not you want to get a survey find out first if there is a recent and existing one. Because a survey can take several weeks, make sure your realtor helps you arrange a time frame with the
surveyor. Tell the surveyor if you want the survey recorded with the register of deeds so it can be located later on if you lose the original—surveyors and attorneys do not do this automatically, you must ask and follow up. If you do not have it recorded and lose your original copy you will have to go through the process all over again.
To make it easier, check out the complete list for a Buyer to Complete in Due Diligence Period.
So, now that your Due diligence is complete. Is this the house for you? If it is then the next step will be the closing. Next month will examine the issues to be aware of to prepare for this third and final step to home ownership.
If you have any questions about the Due diligence process or anything we have discussed up to this point, feel free to give Sandy McCall, Broker/Realtor/Owner at Southern Life Realty in Asheville a call. She can be reached at (828) 273-9755.
“Obviously, there’s the temptation to sit back and smile … But there’s so much at stake, we have to do our due diligence.” – Ralph Neas
Lorri Gifford has been reading Tarot Cards since 1986. While living in California, she worked at The Chopra Center for Wellbeing as their Spa Director and a Lead Educator. Lorri enjoys writing, giving readings, coaching and helping others develop and deepen their intuition. She currently resides in the Raleigh area and is available for phone or Skype consultations. Call her at (619) 602-8981 or check out her web site.