- May 12, 2023
- Posted by: Masters
- Category: Blog
Table of Contents
What Is Due Diligence?
Due Diligence is a term used in real estate about which many don’t know. However, it is quite a crucial term and everyone in real estate must have an idea about it. So, today is the time you learn about it.
Due Diligence real estate is kind of a check that is conducted in the real estate sector before finalizing any sort of deal.
If we are to rightfully conclude what is due diligence we can make the best use of the following definition. Due diligence means that when you are out there in the field choosing a home for yourself it is a time period that allows you to do your necessary home check before finalizing the deal.
It is considered a golden opportunity for people who are out there in the market betting all of their investment money on the sale and purchase of a home or property. This way the homebuyers can back out of a deal before it gets too late.
How Long Is Due Diligence?
Due diligence starts the moment home buyers and owners move forward with a contract. The period starts when both the parties have signed the contract.
The time period of due diligence might differ from one contract to the terms of the other, but on a general basis, this time period is 7 to 14 days. If the contract is complicated then this time period can be as short as 1 day and as long as a month.
Once you are done with the due diligence period, you can talk to the homeowner regarding the suggested repairs or can negotiate the price with them.
The Ultimate Due Diligence Real Estate Checklist
One of the main reasons why you need to keep an eye on due diligence is to make sure that you are getting the best out of the money that you are putting on the market.
So, in case you need assistance regarding the things that should be on your checklist, we have compiled some of the things that you need to cater to:
- The Unemployment Rate in the Area
- Crime Rate
- Business Openings and Closings
- Trade Options
- Job Growth and the Spike in Population
- Accessibility to the Nearby Areas
- Fair Market Trends
- Market Vacancy Trends
- Gross Rent Collected
- Market Vacancy Trends
- Utility Expenses
- Property Management, Leasing, and Advertising Fees
- Title Commitment on the Property and Legal Description
- Phase I Environmental Report for a Property in the Nearby Areas
- Zoning or Use Certificate for Property in Rural or Unincorporated Areas
- Most Recent Land Surveys
- Review Files of the Tenant, Including All the Necessary Information Such as Deposit Amount, Terms and Conditions, and Credit Checks
- Insurance Claim History on the Property for at Least 3 Years
Types of Due Diligence
There are two types of due diligence that you need to know about:
Pre Offer Due Diligence
A pre-offer due diligence gives you all the time in the world to assess the condition of the property before you move forward with the claims on the property. This is an important part of the contract because the more time you have for the property analysis, the better research you can conduct:
Area and Location Review
So, when you are out there to make an offer on a house. Here are some things that you need to keep in mind before finalizing the contract:
Ask about the crime rate in the area. You also need to stay curious about the population growth and the job status of the neighborhood. This information is crucial because it will provide you with a first-hand assessment of the ongoing residential status of the neighborhood.
Moreover, during your pre-offer due diligence, you also should be curious about the property value trends as well as the number of rental houses in the area like Smart City in Lahore. Another thing to check under the context of pre-offer due diligence is the median household income levels.
All of these metrics are helpful for cementing the importance of how well the neighborhood is performing as a community in the market.
Some other things that you need to ask under the bracket of the financial statement during the pre-offer due diligence include property taxes and insurance claims. You cannot let this one go because if you are not asking questions about it then it can cost you a lot of money at the end of the day. Then you also need to be asked questions about the vacancy, credit loss, late fees, gross rental income, repairs, and maintenance as well as property lease and management fees.
Your financial queries also involve you becoming curious about the capital reserve account because it provides an analysis inside the new HVAC and also adds value to the room addition.
Review of Financing Options
In case you are financing a new house or a property, you need to be curious about the loan adjustments for the purchase. Whenever a homebuyer approaches a lender they ask for the full load return. They will also move your attention to the areas which have been previously overlooked. This will provide you with a better picture of how the deal is commencing.
Post Offer Due Diligence
Now comes the prospects of post-offer due diligence. Once you have submitted the proposal and the deal has been accepted, the clock is ticking:
During the post-offer due diligence, you need to assess the structural items in the house such as on the roof and the foundation of the house. This maintenance analysis also caters to the HVAC, plumbing analysis, driveway, sidewalk, and drainage.
It also encapsulates some other aspects of home analysis such as radon gas inspection and flood zone verification. If you are making a purchase in a rural area then you also need to ensure the following:
- Septic Inspection
- Well Water Inspection
Financial Analysis and Review
You also need to acquire the capital improvements invoices and need to get your hands on the proof of payment for the said property. In addition to all this, you also need to inquire about the lease terms, expiration date, deposit amount, and discounted rent. While doing all this, you can also compare the two proformas with one another.
Loan and Legal Issues
During the post-offer diligence due, you need to do some of the most necessary things such as review the HOA. Furthermore, the analysis of the financial strength of the profit and loss is also inevitable. Make sure to obtain quotes from homeowners and check for any litigation in the receipts for the recent works. You can also review the property appraisal. All of this is highly beneficial because it helps you to plan a loan for the property.
The Bottom Line
Hence, the concept of due diligence proves that it is an important thing to understand before acquiring real estate assets. That is when the real estate agents play a due role in the whole scene.
Next time you are in the market, analyzing the trends and checking which property you should buy or skip, keep these things in your mind.