Your home is one of the largest purchases you will ever make. But when buying a home, many homebuyers do not know what they need to do during the period of time after they sign the purchase agreement and before the real estate closing. This is known as the “due diligence” period. It is an opportunity for the homebuyer to have the home inspected before the real estate closing.
To avoid making a financial mistake, a homebuyer should perform “due diligence” to learn everything they can about the home they are considering buying before it’s too late. But what exactly does “due diligence” mean, and what should a homebuyer have inspected?
“Due diligence” refers to the “research and analysis that a person or business performs in preparation for a business transaction.”
When purchasing a home, a buyer should perform due diligence because, in most real estate transactions, the buyer is at a disadvantage. The buyer has almost no knowledge of the property they are considering purchasing. By performing due diligence, the buyer can learn as much as possible about the property and mitigate any risks associated with the purchase.
While most standard real estate contracts include provisions for a general home inspection, proper due diligence involves much more than that. A buyer should review and analyze as much information as possible, preferably with the assistance of an experienced real estate attorney.
Learn as much as you can about the home from publicly available sources, including the name(s) of prior owners, how much they paid for the property, information about property taxes, the square footage of the home, zoning information, and details about condominium or homeowners associations.
In Michigan, sellers of residential property are required to provide a Seller’s Disclosure Statement. This document should reveal everything the seller knows about the property, including whether there are problems with the roof, or electrical or plumbing systems. However, a buyer should not rely exclusively on what the seller says and should conduct their own independent inspections.
Hire a qualified home inspector to assess the property. Do your research and learn about the inspector’s qualifications and experience. Ask what will be included in the inspection. Attend the inspection and ask about maintenance and repairs that may be required in the next 10 years.
If the inspection reveals issues with specific parts of the home, follow up with a specialist like a roofer, electrician, stonemason, plumber, or electrician and ask for repair estimates. In older homes, you should have the sewers inspected using a sewer scope.
Talk to neighbors. Ask if they can hear noise from the nearby train tracks or activity from a commercial property. Visit the property after a hard rain to look for drainage issues. Observe traffic patterns during rush hour. Review crime statistics and sex offender registries. Consult news sources and county auditor’s websites about any local issues.
The Title Insurance Commitment provides important information about liens, easements, building and use restrictions, condominium and homeowners associations, taxes, and other matters. Make sure you have a clear understanding of these documents to ensure that the property you think you are purchasing is the property that is conveyed, and so that you understand any limitations on your use of the property.
The closing documents should be available for your review at least 3 days before the closing. Review the documents with your attorney, check the numbers for accuracy, and be sure you understand everything that you are signing.
By performing due diligence, you will identify any potential problems that should be addressed prior to the closing. And if the home inspection does not reveal any problems, you gain peace of mind in knowing that you are purchasing the home you bargained for.
Many buyers mistakenly believe that home inspections are only necessary for the most expensive real estate transactions. But in reality, buyers of lower-priced properties often fare far worse when they do not perform due diligence than those who purchase higher-priced real estate. People who purchase lower-priced properties are often less likely to be able to absorb the financial cost of a loss, unanticipated litigation, or unanticipated expenses.
Even the most basic real estate contracts include a due diligence period during which the buyer can have the home inspected. But there may be significant limitations on the terms of these inspections.
For example, standard broker forms often refer to the buyer’s right to perform a “General Home Inspection,” “Pest Inspection,” “Radon Inspection,” and “Lead Paint Inspection.” However, many standard real estate contracts require that inspections be performed within short time frames of 3 to 7 days. In addition, the standard language contained in pro forma real estate contracts is often unclear and is more friendly to the seller than the buyer. Finally, real estate contracts rarely specify what will happen if the buyer discovers any problems with the property or how these problems will be addressed.
A savvy homebuyer should consider negotiating the amount of time they have to perform a home inspection and the types of inspection that will be performed. The buyer should also consider title issues such as liens and easements, perform a survey to check boundary lines and encroachments, and have an attorney address what will happen if any problems are discovered.
If you are purchasing a home, it is important that you perform your due diligence, have the home inspected, and ensure that the property you think you are buying is actually the property that is being conveyed.
Experienced real estate attorney Bill Ager can help by reviewing the terms of the contract, reviewing the Title Commitment, and representing you at the real estate closing.