What Does Due Diligence Mean in a Real Estate Contract?
Just what does due diligence mean in a real estate contract? If you are looking to purchase residential or commercial properties in Arizona, that becomes a pivotal question.
Anthony Law Group’s real estate lawyers in Phoenix, AZ, break down the purpose and process surrounding due diligence below. You’ll also find out what to expect when negotiating the final purchase and sale agreement.
Kicking Off The Due Diligence Process
Due diligence comprises a legal term to describe an entire process. These are the steps required for an entity to comply with a legally binding contract. So, when one involved party practices due diligence in real estate dealings, they carefully weigh in-depth information and circumstances surrounding that agreement.
Taking advantage of the due diligence period is important if you want to avoid disastrous legal liabilities, damages, and losses.
What Does Due Diligence Mean in a Real Estate Contract?
Due diligence within real estate transactions refers to both the buyer and seller satisfying various aspects of a purchase contract before finalizing things. The buyer determines whether the property matches the agreed-upon purchase price. This is easy when working with a real estate agent and lawyer to conduct investigations into the property’s condition and value to assess the purchase agreement.
The purchasing party has a predetermined time frame for this process. So, the buyer decides whether to continue after this due diligence period.
When the Real Estate Due Diligence Period Begins and Ends
Typically, due diligence periods begin with accepted sale agreements, as follows:
- The buyer puts forth an earnest money deposit, also known as due diligence money.
- The seller’s agent, real estate lawyer, or an agreed-upon third party holds this deposit until the due diligence period ends.
- Once the due diligence period ends, the deposit goes toward the final transaction.
The seller returns the deposit should the buyer choose not to move forward (normally, this due diligence time period spans two weeks to a month).
What Does the Due Diligence Period Entail?
Many first-time property owners imagine needing only a real estate agent and a negotiated price to secure their property ownership. However, hiring real estate lawyers in Phoenix, AZ, who understand the property-purchasing landscape is wise. That way, you will make an informed decision and be more likely to avoid legal issues.
So, what does due diligence mean in a real estate contract? What does the process entail? The typical due diligence period consists of the following diligence items.
Home Inspection and Appraisal
A qualified home inspector will carefully examine the physical condition of the property and its buildings. Your inspector will focus on:
- Structural integrity
- The quality of the plumbing and electrical wiring
- Whether building supplies contain hazardous materials like lead paint or asbestos
If the home inspection doesn’t highlight any safety risks, an appraiser may perform a further investigation. The inspector then gives a green light if the property’s financial condition matches the agreed-upon price.
A title company performs a title search to reveal pending lawsuits or easements the home buyer might miss. Liens, unresolved court cases, and other issues found within the property history would need to be corrected or solved by the seller.
You can rewrite the contract or end the sale to avoid a transaction with litigious consequences.
A surveyor confirms a property’s legally recognized boundaries, structures, and topographical features. Then, they draft the land’s legal description.
Sometimes, a piece of land has unauthorized structures that encroach on other tracts and kickstart future legal battles with your new neighbors. For example, an existing fence sprawling into neighboring property requires the seller to eliminate the encroachment or lower the property’s asking price.
The seller’s responsibilities for due diligence include writing disclosures to detail anything the investigation reveals.
The statement helps future buyers make informed decisions.
Homeowners Association Requirements, If Applicable
If you purchase a single-family home in an area with an HOA, then the association will have binding bylaws, maintenance requirements, and fees.
Homeowners associations enforce strict rules that could limit your ownership freedom if you’re unaware of the details.
Properties in underdeveloped areas might contain habitats that help native or endangered plants and wildlife thrive.
The law may protect those species while limiting your plans for the property, so be sure to check.
If you’re buying real estate, mortgage loans often require that you insure it before finalizing the sale.
What does due diligence mean in a real estate contract in terms of insuring your new asset? Your insurance will depend on the region’s threats, for example, flood insurance might be required in an area prone to floods or next to large bodies of water.
The Risks of Sidestepping Due Diligence
Although commercial real estate purchases require a due diligence period, the home-buying process may not. However, you should still hire a real estate attorney to facilitate a thorough due diligence checklist to ensure your preferred residential property meets your expectations. Otherwise, buyer beware!
Expensive and limiting potential risks are endless, such as:
- Usage limitations: Like most buyers, you may want to renovate. What if you encounter permit limits you didn’t know existed before the transaction?
- Building hazards: Both commercial and residential properties can harbor secrets. Inspections, appraisals, and legal guidance illuminate dangers, such as whether your newly purchased building contains carcinogenic materials that put its occupants at risk.
- Undocumented legal troubles: The court holds you responsible for unresolved legal matters after the seller transfers the title to you. Why add legal obstacles to an already stressful moving experience?
So, while the due diligence period can be time-consuming and understandably frustrating, it is in your best interest. Hand over the diligence and work closely with your lawyer to uncover as much as possible about your potential purchase before you sign anything.
Consult With Anthony Law Group for a Smoother Real Estate Transaction
What does due diligence mean in a real estate contract? This process protects you from unforeseen issues before finalizing a transaction, and not only for a new piece of property.
Why not let Anthony Law Group assist you with purchases, sales, commercial lease termination, and more? Call 602-362-2396 to schedule a consultation.