We’ve all been there!
You see something in a store that looks amazing — like a new gadget and decide to buy it without a second thought. Later on, you realize the item isn’t what you expected. Perhaps its functionalities are lacking, or the build quality isn’t particularly remarkable.
Fortunately, at a store, you can return the item and get your money back.
With real estate, however, there’s no return policy. Buy a defective property, and your only option is to sell it or live in it for the rest of your life. That’s why due diligence is of utmost importance in real estate transactions.
But what exactly is due diligence in real estate? And most importantly, how can it help you avoid a bad deal? This article will delve into the crux of due diligence in real estate and explain why it’s important when buying property.
What Is Due Diligence in Real Estate?
The Oxford dictionary defines due diligence as “a comprehensive appraisal of a business done by a potential buyer to establish its commercial potential.”
Legal practitioners define due diligence as the exercise of care that a person or an entity is expected to take before entering into any agreement.
In real estate, due diligence is simply “doing your homework.” In other words, it means taking necessary steps to ensure the property is in good condition, has no liens or encumbrances, and that the title exists and is in the hands of the rightful owner.
Due diligence in real estate is simply an investigation conducted to uncover any existing risks or defects in a property. As noted earlier, there’s no return policy or period for real estate, so you need to know everything you can about the property before closing the deal.
The Key Principles of Due Diligence in Real Estate
Real estate due diligence is diverse and comprehensive.
The complex nature of real estate transactions makes buyers question whether they’ve covered all the essential components of an effective due diligence process. Instead of wondering, you can follow these four principles to ensure your due diligence is complete and comprehensive.
- Know the area you’re investing in
- Know the property
- Know the seller
- Understand the intricacies of the deal
Know the Area
The first thing you’ll want to do is conduct comprehensive research on the area you intend to buy property. You don’t want to buy a house in a crime hot zone or in a location where you can’t safely walk alone at night.
Do your homework!
Find out more about the crime rate in the region. A simple Google search should populate these results. There are also websites, like SpotCrime, that can help you find the crime rate in a specific location down to its neighborhood.
Besides the crime rate, you’ll also want to check for any upcoming development projects that could increase the property’s value in the future. Also, look at comparable listings for homes sold in the last six months to ensure you’re not overpaying for the property.
Know the Property
Once you’re confident the property is in a good and safe location, you can focus your attention on the property. Your real estate agent will conduct the inspection, but it’s your duty, as the buyer, to hire a home inspector.
Still, you’ll need to inspect the property in person to see if there are any defects.
Check the roof, windows, and foundation. Once inside, examine the HVAC system, flooring, furnace, and appliances to ensure they are in good working condition. Your home inspector will provide a detailed report of the property, including its structural integrity, but you should also have your own evaluation of the property and the included appliances.
Know the Seller
Understanding the seller’s motivation can help determine if the deal is good. Ask yourself these questions:
- Why is the seller selling the property?
- Is the property banked-owned?
- How long has it been on the market?
- Does the seller have the right to sell the property?
Making an offer without any knowledge puts you at a disadvantage. But if you know the motive for the sale, you’ll have the points to present at the negotiation table. Buying from a reputable seller also gives you peace of mind in knowing you’re not being scammed.
Know the Deal
If everything checks out, you can proceed to make an offer on the property.
First, you need to be comfortable with the specifics of the deal; otherwise, it will be very difficult to back out of the sale once the offer is made and signed.
Take your time to go through the contract. Check to ensure there are no contingencies that may put the sale at risk. Understand how much you’re putting down and when you need to close. During this time, you should rely heavily on your real estate closing attorney.
Why Is Due Diligence Important in Real Estate
Due diligence is critical because it helps you uncover flaws in an investment property. You cannot determine if there’s any flaw in the property you plan to buy unless a thorough investigation is carried out.
Plus, it’s likely that the seller will not disclose the defects in a property to sell it at an advantageous price. At times, the homeowner may even be aware of the risks associated with the property and may be looking to dispose of it to an unsuspecting buyer.
Carrying out pre-purchase due diligence on a real estate property helps the buyer to:
- Clarify the legal status of the property in question
- Ensure the title exists and is in the hands of the rightful owner
- Minimize any risk, whether tax or compliance related
- Reduce the risks of potential disputes after the sale
- Agree on the important conditions of the sales agreement
Failure to exercise due diligence can lead to heavy financial losses and endless disputes that could have been avoided early on.
What’s Next? Hire an Experienced Real Estate Attorney
Many laws govern the sale of real estate property, and you’ll want to ensure you are not violating these laws. Unless you have a legal background, it’s recommended to hire a real estate attorney.
Real estate attorneys have the training and experience to handle real estate issues and problems that can arise during the sale and transfer of title.
In short, a real estate attorney will help you navigate the legal landscape. They’ll provide the required due diligence for the following legal issues:
- Title discrepancies
- HOA rules and fees
- Homeowners Insurance
- Pending litigation
- Any legal issues that may arise over the course of ownership
To minimize risks and avoid unpleasant surprises at any stage of the sales process, hiring an experienced real estate attorney is highly recommended. Cipparone & Cipparone is a reputable law firm dedicated to ensuring that our client’s interests are protected against risks associated with real estate deals.
Our highly knowledgeable attorneys will conduct a thorough investigation and analysis of the property in question and provide real estate legal advice to help you avoid a bad deal.
**This blog is for general informational purposes only. Cipparone & Cipparone, P.A. does not distribute legal advice through this blog. As such, this blog does not constitute legal or other professional advice, and no attorney-client relationship is created between the reader and Cipparone & Cipparone, P.A.Tags: orlando housing market, real estate law, real estate tips
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