The Complete Real Estate Due Diligence Checklist

Whether you’re buying your first house or upgrading to your dream home, it’s important to remember that you’re not just moving to a new place — you’re also entering one of the largest contracts of your life and making a huge financial investment. That’s why a thorough real estate due diligence process is so important.

At On Q Financial, LLC, we believe that the dream of homeownership is inclusive, so we want to give you all the information you need to feel comfortable that you’re making the right decision to choose us. We provide you with objective information to help you move through the home-buying process with confidence.

What is due diligence in real estate?

“Due diligence” describes the buyer’s responsibility to research a property before ownership changes hands. When you make an offer on a new home, the purchase offer contract provides time for you to perform your duties.

In some markets, the seller might ask you to pay a “due diligence fee,” which is a non-refundable payment made to the home seller to take the property off the market while you do this vital research. You can ask your realtor or mortgage consultant whether these fees are standard in your area – if they are, it’s a good idea to do as much as you can before you decide on a potential home and enter negotiations.

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What real estate due diligence tasks should I put on my checklist?

Due diligence on a home will include evaluating your personal needs and wants, researching the property, and securing financing and insurance. Your mortgage consultant can be a great resource, but it also pays to do your own research and talk to friends, family — even your (potential) new neighbors. Everyone’s experience is a little different, but you can use this checklist to guide your journey.

Understand your priorities

What’s important to you in a new home purchase, and what are you willing to compromise on? Location, bedrooms and bathrooms, carpet or hardwood floors, pool, etc., can be deal-makers or deal-breakers. A list of non-negotiable items can help narrow your choices and reduce the time it takes to find your next home. Run your lists by your real estate agent to make sure you’re being realistic for your market.

Research the area

Whether you’re planning to move across town or the country, the three most essential things in real estate are still location, location, and location. Knowing your potential new neighborhood today and the plans for the near future can help ensure you’re making a great choice. When you evaluate the market in your target area, you may consider:

  • Median home price
  • Days on the market
  • Neighborhood schools and school districts (even if you don’t have kids now or aren’t planning to)
  • Number of owner-occupants (how many rental homes in the area)
  • Homes in foreclosure
  • Price growth trends
  • Future developments nearby

Know how you’ll pay

It’s a great idea to get your financing as far along as possible when you’re ready to buy a home, and this allows you to act fast when you find the right home for you. Getting prequalified and preapproved for a mortgage are two different but essential steps in your journey.

Prequalification means that a mortgage professional has looked at your finances (assets, income, and debt) and estimated the amount of a loan that you can afford. It’s usually the first step.

The next step is pre-approval, a more official process where a lender looks at your bank accounts, credit history, tax returns, and other important financial information. A pre-approval letter is only good for a limited time, so you want to make sure you go through this step when you’re ready to act.

A mortgage consultant can help you go over your options, prequalify you, and help you start to gather the documents you’ll need for pre-approval.

Check with City Hall

It’s not possible to tell the future, but if you check with your local government departments, you can research the plans for your neighborhood. Your town or city’s planning department and building and safety department can provide you with some peace of mind.

The planning department can let you know if projects are on the books that can impact the value of your home down the line. Think about how your property value could be impacted if a sewage processing plant came in two years from now.

The building and safety department can tell you if any permits have been pulled on the property. These will let you know if updates were done correctly.

You may also want to see what zoning laws might pertain to the property. Zoning rules may prohibit mobile homes or sheds, determine rental capabilities (if you think you might use the home as an income property in the future), and dictate whether parking certain vehicles or trailers are allowed.

When you’ve made an offer have the home appraised

Once you have financing in hand and make an offer, an appraisal is the next step. A professional appraiser will consider the values of the homes in the area and make specific adjustments based on the features of the property you plan to purchase.

This is an integral part of the process for your lender because it ensures you’re getting a good deal. If the appraisal comes in lower than your offer price, you can negotiate with the seller.

Discover unique concerns in the neighborhood

Every home requires maintenance, but some locations require more upkeep than others because of weather, climate, even the plants, and animals. It’s good to ask about wildlife, bugs (like cicadas, termites, and scorpions), storms and flooding, and seasonal extremes. Having these answers will ensure you’re prepared to deal with issues in the future.

Review the seller’s disclosures

Some states require sellers to document and disclose known issues with a house, including problems with the foundation, roof, systems, structures, etc. These disclosures can and should affect your negotiations on the home’s final price. Suppose your state doesn’t require these disclosures (these are called “caveat emptor” states, which means “buyer beware”). In that case, it’s even more critical that you perform due diligence, including a highly rigorous home inspection.

Call in the inspector

In general, an appraisal is for your lender, and the home inspection is to protect you. A professional inspector will walk through the house for two to four hours and provide a detailed report and summary of any issues. 

Often, you may be present for the inspection.

Based on your inspection, you may be able to opt-out of your purchase, renegotiate the purchase price with the seller, receive cash at closing to offset the cost of any repairs, or choose to go forward with the purchase as planned.

If your inspector thinks there are unseen issues (or if you discovered potential issues while talking to your future neighbors), it might be necessary to hire a specialty inspector to investigate issues with environmental toxins, foundations, roofs, plumbing, and electrical systems.

Order a survey (if you’re buying huge tracts of land)

If you’re looking at a rural property or significant acreage, it’s a good idea to order a survey — a map of the property that shows its boundary lines along with any easements (someone else’s usage of the land). A survey may be required by your lender if you’re in a rural area because the exact coordinates of the survey will be listed on the deed. Plus, if the survey reveals any discrepancies (like a neighbor’s fence on the property), you may want to resolve it before closing the sale.

Review the CC&Rs

Many neighborhoods now have homeowner associations (HOAs) or condo-owner associations (COAs) that are designed to encourage cooperation among neighbors and higher home values. If your property is part of a HOA or COA agreement, the association will have covenants, conditions, and restrictions (CC&Rs) that apply to the home that might include regulations on:

  • Legalities, dues, and assessments
  • Outside architecture and appearance
  • Use of common areas (pools, fitness rooms, playgrounds, etc.)
  • Noise and behaviors
  • Pets
  • Whether you can rent the home

Read through the CC&Rs to make sure you can live with them.

Get insurance for unexpected events

Because real estate is such a significant investment of your time, emotions, and money, you must protect that investment with various insurance policies. It’s good to line up your insurance needs before you close, so you know what all of your living expenses will be, including:

  • Title Insurance: A house title at its most basic shows who legally owns it. When you close on your home, a title company may perform a title search to ensure the seller has the right to transfer ownership. If the search misses something, heirs or outstanding liens may arise, creating a legal nightmare. Title insurance protects you from these legal expenses.
  • Homeowners insurance: If your house (and the belongings inside it) should experience a disaster like fire, smoke, vandalism, lightning, etc., homeowners’ insurance will provide coverage to repair and rebuild your home, and may replace some of your possessions.
  • Liability coverage: Because your home is likely the most significant financial asset you own, it is at risk if someone ever sues you for injury. You can protect this asset with liability coverage for you and anyone living in your home.
  • Flood insurance: If your prospective home is located in a FEMA flood zone, you will need flood insurance. Your insurance agent can help you get a policy that FEMA underwrites.

Why due diligence is important when buying a home

A house isn’t something you can return to the store. For all the work that you’ll do to find and buy your next home, this real estate due diligence process will help you feel confident you’ve done everything possible to make your home purchase a success. Plus, you don’t have to do all this alone. An On Q Financial, LLC Mortgage Consultant can help you through these steps and provide valuable recommendations and referrals for resources.

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