When it comes to purchasing residential property, conducting thorough due diligence is essential for making informed decisions. Whether you're a first-time buyer or a seasoned investor, understanding the various aspects of conducting due diligence for residential properties can significantly impact both your investment and your peace of mind. In this resource, we will explore key considerations such as property inspections, market analysis, title research, and assessing financial implications. By equipping yourself with the right information and insights, you can navigate the complex landscape of real estate with confidence and ultimately secure a home that not only meets your needs but also aligns with your long-term goals.
What is Due Diligence When Buying a Property?
Due diligence for buying a property aims to unearth issues pertaining to the physical and financial condition of a property so that buyers can make informed decisions and safeguard their investments. Due diligence for property purchases includes investigating structural problems, environmental risks, zoning restrictions, title defects, outstanding liens, and more.
In other words, due diligence plays a crucial role in uncovering hidden problems that could potentially jeopardize a property purchase. Buying a residential property is one of the biggest investments that someone can make during their lifetime, so it's essential that residential property buyers do their own research before committing to any property.
What is the Due Diligence Period?
Due diligence and the formal due diligence period in real estate transactions are two different concepts. The due diligence period in real estate is the period of time between an accepted offer and closing. During the due diligence period, the buyer has time to do due diligence tasks like getting an appraisal, performing a title search, and getting a property inspection. If the prospective buyer uncovers any issues that arise from their investigations during the due diligence period, they can negotiate with the seller to address any issues.
How Long is the Due Diligence Period?
The formal start of the due diligence period depends on the specific contract with the seller. In the U.S., most states allow residential property buyers to conduct due diligence for around two weeks. Some agreements may call for much longer due diligence period depending on the complexity of the purchase. For commercial properties, the due diligence period is much longer than the due diligence period for residential properties.
Real estate due diligence laws and timelines differ significantly from one state to another. Your real estate agent can offer precise insights into the legal issues relevant to your situation and inform you about your options should any problems emerge. These details should be clearly outlined in your purchase contract, so don’t hesitate to ask questions if anything is unclear.
How to Conduct Due Diligence on Residential Property
Before and after submitting an offer to purchase a residential property, there are a few essential steps that buyers must conduct to ensure that they are making a sound decision.
Research the Location
It's important that you research a property's location to ensure that its neighborhood is right for you before submitting an offer. This includes:
Checking into crime rates for the general area
Exploring the property's proximity to amenities like stores, doctor's offices, and more
Reviewing the homeowners association (HOA) fees and rules
Looking into the quality of the school district if you have children or plan to
Check Zoning
If you're interested in adding anything to a property, or if you're purchasing a property that also has open land, you must check whether you can use the property for your intended purpose by checking the property zoning. There are many different types of zones, and a few different ways to evaluate a property's zone. First, you can verify a property's zone by reviewing the zoning certificate, particularly the Section 149 Certificate included in the sales contract, or by consulting the town planning department at your local council. Alternatively, many online tools and real estate applications provide zoning information, such as LandApp. With LandApp, you can create a property report for any U.S. property that you're interested in purchasing and the application will provide you with the property's zoning designation.
Evaluate Potential Environmental Risks
Environmental due diligence is an important procedure that evaluates a property or land for possible environmental contamination risks, such as groundwater or soil contamination. Researching any potential environmental risks is a critical aspect of conducting due diligence, but is often overlooked for residential properties.
1) Natural Disaster Risks
Evaluating natural disaster risks is crucial when conducting due diligence on residential property. Areas prone to flooding, earthquakes, hurricanes, or wildfires can significantly impact the safety and value of your investment. It's essential to check local government resources and geological surveys to understand the historical frequency of such events in the vicinity. Additionally, flood zone maps can provide insights into potential vulnerabilities, while insurance companies often have data regarding typical claims in specific areas. Understanding these risks not only enables you to make a more informed decision but also helps in determining coverage and preparing for possible future losses.
LandApp's property reports break down a property's risk for various natural disasters, such as tornadoes, straight-line winds, hurricanes, natural and induced earthquakes, and more.
2) Property Contamination Risks
Evaluating property contamination risks typically includes conducting a Phase 1 Environmental Site Assessment, which checks for the potential presence of hazardous materials and soil contamination.
Getting a formal Phase 1 ESA report can be costly and time-consuming. You can find out if any property could be contaminated by subscribing to LandApp for $10 monthly, which is a great precursor to a formal Phase 1 ESA report and can let you know whether or not a property that you're interested in purchasing is worth pursuing further. With LandApp, you can simply create a Property Report for each property that you're interested in purchasing to evaluate its contamination risk for various environmental factors. When you export a property report, LandGate will provide you with more information about the specific contaminants located near the property along with the contaminated site's remediation status. The report will also break down the property's risk for various natural disasters, such as tornadoes, straight-line winds, hurricanes, natural and induced earthquakes, and more.
Understand the Property Disclosures
Sellers must disclose any known defects or facts that could adversely impact the property. These disclosures are included in the listing documents, which are accessible to the buyer's agent. Common examples found in property disclosure statements include pest infestations, appliance malfunctions, and water issues in the basement. As a buyer, it's crucial to fully understand these disclosures. Holding the seller accountable for any undisclosed, non-obvious issues discovered after moving in can be quite challenging.
Research the Market
Before signing a contract, it's crucial to grasp the property's true value. Examine recently sold properties in the area and compare them to the one you're considering. This will provide you with a clearer understanding of what your offer should be.
Survey the Property
A property survey is essential for determining and confirming the property lines and legal descriptions of a property. For homes adjacent to neighbors, a survey can help prevent encroachments, which are disputes over property lines. It also identifies any easements, such as shared driveways or utility poles with neighboring properties. Additionally, a survey provides information on elevation and hazard areas, both crucial for insurance assessments.
If the property you plan to purchase hasn’t had a survey completed recently, it’s wise to add this task to your due diligence checklist. Depending on state regulations, you may be required to obtain a new survey regardless of when the last one was conducted.
Hire a Property Inspector
Perhaps one of the most important parts of buyer's protection after submitting an offer and during the formal due diligence period is to hire a property inspector. Property inspections are meant to help buyers avoid buying a lemon house. Inspections are usually optional unless mandated by a lender. Including an inspection contingency could make you appear less attractive as a buyer, especially if other buyers are opting to waive these contingencies.
Get an Appraisal
Home appraisals offer a professional assessment of a property's monetary value. If you're planning on financing the purchase, lenders require these appraisals to ensure that the requested loan amount aligns with the property's estimated worth. An appraiser, who acts as a neutral third party hired by either the lender or the buyer, conducts a thorough inspection of the property. They prepare a detailed report that considers the home's positive features, current market trends, and recent sales of comparable properties. After the report is completed, the lender reviews it to decide on the next steps. If the appraised value significantly falls below the agreed sale price, the transaction may be delayed or even canceled.
Conduct Title Research
During the closing process of the formal due diligence period, a title company will perform a title search on your home to uncover any outstanding liens and potential issues that could complicate the transfer of ownership. Be aware that your lender may require any identified issues to be resolved before approving financing for your home purchase.
What is the Cost of Property Due Diligence?
The cost of conducting property due diligence varies state by state. Title research can cost anywhere between $75 and $200, while hiring a property inspector typically costs between $400 and $700. An appraisal typically costs between $300 and $500 depending on the size of the property. Regardless, you will need to hire third parties for these inspections and appraisals, which move quickly so the rest of the closing can proceed.
When purchasing a residential property, it's recommended that you work with a local real estate agent that can guide you through the due diligence process and requirements. A real estate agent can handle most of the scheduling and communication between parties as well.
Some of the steps mentioned above, like checking the property zoning and assessing potential environmental risks, can be costly but are not required, but they can save you from potential headaches in the future. The most cost-effective way to evaluate these factors is to subscribe to LandApp for $10 per month. LandApp's due diligence tools for residential real estate provide environmental risk index scores and in-depth property data to help you determine if a specific property is worth pursuing further. The property data provided by LandApp includes information on soil types & bedrock, topography & slope, physical property features, and more.
