There are many factors that go into a home buyers due diligence period. This term is used very loosely and can mean a multitude of things.
In a real estate transaction, due diligence refers to the time a buyer has to investigate various things throughout the property. This ensures they are making a sound investment. This includes things like price, physical condition of the
property, and a clean title. The due diligence time period is put in place to protect the buyer, the lender, and their investment. If for some reason one, or all of these things don’t check out, the buyer has the right to back out of the deal. They can continue looking for a property more fit for their real estate investment goals. Therefore, a buyer is never bound to a property just because they sign a purchase agreement.
An appraisal is a very important part of the buyer’s due diligence period. So this indicates if the home is priced accurately according to the fair market value. In addition, if the home’s price matches the condition of the property. The appraiser is verifying that the buyer and lender are secure in their purchase. They make sure they’re not overpaying for the property. Once a property is under contract and the home is fully rehabbed or built, the lender will then order an appraisal on the property. It is important to remember that the appraisal is ordered by the lender. It’s not at all associated with the buyer, seller, or real estate agent. We get an unbiased, informed opinion on the homes fair market value.
The appraisal can come back low, just right, or high. Watch my recent Youtube video, “Appraisals: What is the Value in a Property.” I discuss in detail how Rent to Retirement handles each of these instances. If the appraisal comes back low, this is where the buyer’s due diligence kicks in. They have the right to back out of the deal, with their earnest money fully refunded. If the appraisal comes back right at the purchase price, or above, we move on to the next order of business.
An inspection on a property is not required if acquiring a conventional loan or using cash to purchase the property. However, this is highly recommended. Similar to an appraisal, an inspection benefits the buyer and lender. It verifies that the purchase is a good investment. Inspections focus on more of the physical condition of the home and making sure that it is safe and habitable for the tenants. Investors are welcome to research and find a local inspector
themselves. Rent to Retirement has several recommended inspectors in each market that we operate in. Sometimes, home buyers will panic when seeing the inspection report. Inspectors go in to every nook and cranny of the property and unveil anything that may not be exactly perfect. This could be as small as chipped paint, a dent in a baseboard or nails showing through paint.
This is exactly what a home buyer is paying for though when purchasing an inspection. A home buyer wants the inspector to go in and find imperfections that they may have missed, so they know everything about the home inside and out before they fully commit to that investment. Once the inspection report comes back, we want to have the buyer go over everything and if necessary, make a list of requested repairs. We then negotiate with the buyer as to what our rehab team will fix on the property before closing. Again, the inspection is part of the buyer’s due diligence period. The buyer has every right to back out of the purchase agreement based off of an inspection report’s results. We hope to negotiate with the buyer to where this does not happen but we want to make sure the buyer is informed of this option.
Lastly, a buyers due diligence period is based off of a free and clear title. During the 30-60 days that a transaction takes place, the title company is digging up all info pertaining to the property that is being purchased. This includes deeds, mortgages, liens, wills, divorce settlements and other documents affecting title to the property. You don’t want any of these issues to arise after you own the property. You are legally liable for them. This is also why a title insurance policy is so important to purchase when buying a home. If, for some reason, something is missed during the search of the public records and it does come up after the property is owned, the new home owner will not be responsible.
In conclusion, when you partner with Rent to Retirement for your real estate investing journey, we make sure to hold your hand and walk you through the whole process. We make sure that this process is done correctly and that the necessary steps are taken to get you to the finish line. In addition, we obviously want you as a long-term client and to start investing as soon as you can but we also strive to make sure you are getting the best properties for your investment and that these steps are done appropriately for your benefit.