So, you’re a buyer looking for your first home or maybe, you’ve bought a few homes in years past, but you aren’t familiar with the term “Due Diligence Period”. What the heck is it all about? It’s really many things that you suspected would need to be addressed before closing, but it is very important that you understand the process and the deadline. After all, it’s your dollars that are at risk, if you don’t.
The buyer and the seller negotiate a fee, the Due Diligence Fee (one of two of the buyer’s fees), which is deposited by the seller once the home is under contract. The fee is non-refundable (in almost all cases), but it will be a credit towards the buyer’s purchase at closing. If the buyer decides to terminate the contract within the DDP (Due Diligence Period), then the seller will keep this fee. The buyer can terminate for any reason at all during this DDP.
Basically, this negotiated fee and time period allows the buyer to complete whatever they feel is necessary to be sure they wish to purchase the home. There is no loan contingency or appraisal contingency, only the Due Diligence Period. So, it is very important to set a date that allows time for everything to determine this. After this date passes, the buyer will lose the due diligence fee, the earnest money fee, and is obligated to buy the home or be in default of completing the contract and purchase. Not exactly small change!
What should a buyer review during the DDP? Below is a list of a few possibilities. Since each home, neighborhood, and situation is different there could certainly be other items.
- Inspections of all types that apply-Home Inspection, Pest/termite inspection, Radon inspection, Stucco inspection, Structural inspection, Lead Based Paint inspection, Asbestos inspection, etc.
- Appraisal-almost always required to appraise by lenders
- Loan approval-each lender is different, so be sure to check to see how much time they may require for loan approval
- Survey-allow time for the survey to be completed, reviewed, and if there are issues/encroachments to be worked out
- Insurance-to be sure insurance is available and affordable for the home, including flood insurance if home is in a flood plain
- Fuel tanks-if there are any fuel tanks (buried or not) on the property and if there is remaining fuel in them
- Streets/Roads-whether the street is public or private, who is responsible for maintaining, whether driveways are shared or not, and any agreements for them
- Utilities-availability, quality, and the cost for electric, gas, communications, garbage/waste, water, sewer or septic tanks and their access to the property
- Flood Hazard-whether the property/home is in a flood plain and the impacts
- Review of documents-including homeowner association documents and requirements, including restrictive covenants. Also, review of title by the closing attorney to be sure clear title is possible
Many times one of the items leads to another, such as the home inspection leading to a structural inspection or licensed contractors to review the extent of certain issues on the inspection report. Many of these vendors require a bit of a lead time for the appointments, since there is a DDP deadline, it is important to stay on top what is needed and move forward quickly. The seller has the right to sell the home in its current condition without making any correction, so the sooner you have the information you need from the various vendors, the better. Many…actually most sellers will make some repairs/corrections, but there are no guarantees until you are in the process of negotiating repairs during the DDP.
Be sure you understand what you feel is required for each home during the DDP in order to be prepared to complete and negotiate the offer. Ask about the timeframe needed for the different inspections. And, ask questions about the entire offer to purchase contract, so that you fully understand the process. The better prepared you are, the less anxiety you will have. Remember there is no perfect house and all houses have issues. But, some houses do have more issues than others, so don’t be left at the DDP deadline trying to decide whether to terminate or take a chance what remains to inspect/review by continuing forward to closing.