Quick answer: The due diligence period is the time between an accepted offer and closing, when a buyer investigates the property, schedules inspections, reviews disclosures, and ensures it meets expectations before finalizing the purchase.
You’ve made an offer on a home and it’s been accepted, marking the beginning of the due diligence period in real estate. During this time, which occurs between an accepted offer and closing, you have the opportunity to inspect the property, verify its condition, and confirm it meets your expectations.
Whether you’re purchasing a property in Sarasota, FL, Wyckoff, NJ, or Carrollton, TX, this guide will provide you with insights on what due diligence entails for buyers and what typically occurs during this phase.
What is due diligence in real estate?
The due diligence period in real estate, post-accepted offer and pre-closing, allows the buyer to inspect the property, verify its condition, and ensure it meets their expectations before finalizing the purchase. It also enables buyers to fulfill any lender financing requirements.
In certain states, buyers may be required to pay due diligence money, a non-refundable fee paid to the seller in exchange for the inspection window. This fee is separate from the earnest money deposit and is a significant part of the process in specific markets.
What is the difference between due diligence money and earnest money?
Both due diligence money and earnest money demonstrate the buyer’s seriousness about the purchase, but they serve different purposes and are handled differently.
Due diligence money
- Paid directly to the seller.
- Typically non-refundable, even if the buyer backs out.
- Compensates the seller for taking the property off the market during the inspection window.
- Only required in certain states (such as North Carolina, for example).
Earnest money
- Paid into an escrow account and applied to closing costs or the down payment.
- Usually refundable if the buyer cancels for a valid reason (such as inspection problems, appraisal issues, or financing).
- Acts as a good-faith deposit to demonstrate commitment.
What happens in the due diligence period?
When purchasing a home, it’s crucial to gather all the necessary details to make an informed decision. During the due diligence period, the buyer is granted a specific timeframe, usually outlined in the purchase agreement, to thoroughly investigate the property before finalizing the sale.
Here’s a breakdown of what typically occurs during this stage:
1. Home inspection
Buyers engage a licensed inspector to assess the property’s condition, checking for structural issues, roof damage, plumbing concerns, electrical safety, and more. Even if not mandated by the lender, hiring a licensed home inspector is wise to uncover any potential issues. If the home inspection reveals significant problems, the buyer can request repairs, negotiate credits, or even opt-out based on the contract terms.
2. Home appraisal
Lenders typically require a home appraisal, conducted by a licensed third party, to validate the property’s market value. If the appraisal comes in lower than the purchase price, it can lead to renegotiation or an appraisal gap issue.
Buyers have several choices if the appraisal falls short:
- Renegotiate with the seller to reduce the purchase price.
- Cover the difference out-of-pocket.
- Terminate the agreement if permitted by the contract.
- Some buyers utilize an appraisal gap clause to specify the amount they are willing to pay above the appraised value.
>> Read: What is a Home Appraisal? How the Process Works
3. Title search and insurance
A comprehensive title search confirms the seller’s legal ownership and identifies any liens, encumbrances, or claims against the property. Title insurance provides added protection by covering financial losses from unforeseen defects like undisclosed heirs or recording errors.
4. Property survey
During due diligence, a licensed property surveyor may verify the property’s legal boundaries, property lines, mapping structures, easements, and encroachments. This report can reveal issues like a neighbor’s fence encroaching on the property or restrictions on construction, assisting buyers in addressing potential problems before closing.
5. Review of seller disclosures
Sellers are typically required to provide written disclosures outlining any known issues with the property. Buyers review these documents to learn about pre-existing conditions or problems. The specific information disclosed varies based on federal, state, and local laws.
This review usually covers:
- Disclosure forms: Detailing known defects or issues with the property, such as leaks, structural problems, mechanical issues, or pest infestations.
- Property history: Information on past repairs, renovations, or insurance claims related to the property.
- Property boundaries: Documentation or surveys outlining the exact property lines, aiding in identifying encroachments, easements, or disputes with neighboring properties.
- Environmental hazards: Disclosures related to potential environmental issues like lead-based paint or asbestos.
- Neighborhood concerns: Any known issues with neighbors, noise complaints, or local developments that might impact the property.
6. Homeowners association (HOA) rules
HOAs ensure community safety and adherence to rules. If the property is part of an HOA, you will receive documents outlining rules, fees, and responsibilities during due diligence. These regulations can impact home use and modifications, so it’s essential to review them carefully.
Common HOA regulations may include:
- Restrictions on exterior paint colors or home additions
- Landscaping requirements or limitations
- Rules on short-term rentals or leasing the property
- Pet restrictions or noise ordinances
- Fees for community upkeep
7. Zoning rules
Confirm that zoning regulations align with your property plans, as they govern usage, additions, and home-based businesses. For example, local zoning laws determine if rental units or detached garages are permissible.
8. Homeowners insurance
While not mandatory, most lenders require homeowner’s insurance for loan approval. Costs and coverage vary based on location, age, and condition; areas prone to wildfires or with older systems may require additional coverage.
9. Final decision
After completing inspections and research, buyers must decide whether to proceed with the purchase, renegotiate terms, or cancel the contract without penalty (if still within the due diligence window).
What if issues are found during due diligence?
Encountering issues with the property is common, and the due diligence period is the opportune time to address them. If problems arise, buyers generally have several options:
- Negotiate repairs: Request that the seller address the issues before closing.
- Ask for a credit: Instead of repairs, the seller may offer a credit at closing to cover the costs.
- Renegotiate the price: If repairs are substantial, buyers can push for a lower purchase price.
- Withdraw: If the problems are significant or costly, buyers can walk away without penalty (if still within the due diligence window).
How long is the due diligence period?
The duration of the due diligence period typically ranges from 7 to 14 days, though the exact length is determined by the purchase agreement and local practices. Some states specify this period by law—for instance, North Carolina often allows 14 to 21 days, while California’s inspection contingency period is typically 17 days unless otherwise negotiated.
State and market variations in due diligence periods
Real estate due diligence periods vary in duration and regulations based on state laws and local practices. Some regions require “due diligence money,” while others use the inspection contingency period.
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State
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Typical due diligence period
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Notes
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North Carolina
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14-21 days
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Due diligence money is standard and paid directly to the seller
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California
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~17 days
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Often referred to as the inspection contingency period. May be shortened in competitive markets.
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Florida
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10-15 days
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Usually negotiable. Some contracts term it the “inspection period.”
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Texas
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7-10 days
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Known as the option period. Buyers often pay an option fee similar to due diligence money.
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New Jersey
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10-14 days
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Commonly known as the attorney review or inspection window.
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Georgia
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10-14 days
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Fully negotiable period, no specific due diligence fee required.
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Illinois
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5-10 days
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Typically referred to as an “inspection contingency period.”
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Tip: Always verify state-specific regulations with your Redfin agent or attorney. Local customs and market competition can significantly impact inspection and decision timelines.
How to prepare for the due diligence period
Preparation for due diligence can help you navigate the process swiftly and confidently once your offer is accepted. Here’s how to set yourself up for success:
- Line up your team early: Arrange inspectors, surveyors, and other professionals in advance to schedule promptly during due diligence.
- Review important documents ahead of time: Study seller disclosures, HOA guidelines, and zoning rules to avoid surprises.
- Understand key deadlines: Keep track of due diligence deadlines and mark them on your calendar.
- Prepare your finances: Set aside funds for due diligence, earnest money, and potential repairs/credits.
- Make a checklist: Develop a personalized list of inspections and research tasks based on your priorities and property type.
- Communicate with your agent: Maintain open communication with your Redfin agent to coordinate, address queries, and advocate on your behalf.
FAQ about due diligence in real estate
1. Is due diligence required when buying a home?
While not mandatory by law, due diligence is highly recommended for home buyers. It allows for property inspection and title verification, giving buyers the crucial option to withdraw from the sale if major issues are discovered, avoiding costly post-transaction