Construction of a new home
Due diligence in a real estate contract involves the buyer investigating all aspects of the property so that they know everything that can be known about the property before a sale. A typical residential sale will have a due diligence period of 14 to 21 days, while commercial property transactions can take much longer, as can commercial but undeveloped properties that the buyer intends to develop. There is no "standard" due diligence period, or legal due diligence period, unless a contract is signed specifying the period of due diligence. It can be as long or short a time period as needed, providing the buyer, seller and lender agree.
Function
As the buyer, you are entitled to know everything about the property you are buying. The law requires much of what you want to know, but laws vary by state. If you are borrowing money, the lender will have their own requirement--starting with an appraisal. They will not loan money for a property that isn't worth the price. A very short list of required inspections includes termites, roof damage and building code violations, a properly titled deed and liens. That is only the beginning.
Potential Issues
Some things will be required as part of due diligence on the part of the lender if you are taking a mortgage out on a home. Required or not, these are areas of potential problems. They include the age of the heating system and boiler and when they were last serviced, signs of corrosion around the heating unit, the condition of piping, cracks or bulges on the interior wall finishes, the electrical service and insulation and whether the building is served by municipal water and sewer systems. These are some of the most important things that are usually included in the formal period of due diligence.
Non-physical Inspection
The more you know about your property the better, and you can start before the formal period of due diligence. Look at public records. Zoning is the first and one of the most important items to consider. If you plan to expand the home at some time in the future, you could be surprised to learn that the property cannot accommodate a home with a larger footprint or a second home. Is the property in a flood plain? Is it located in a special overlay district--a historic district, for example--that restricts what may be done on the property. The property may be irregular, that is non-conforming, to the existing zoning.
Commercial Due Diligence
The purchase of commercial property requires a lot more due diligence, making the investigation time longer. The time period is negotiable, but a lender will usually guarantee an interest rate for only so long. Before formal due diligence, make informal inquiries and check public records, When formal due diligence begins, you will want at least two years of profit and loss statements, balance sheets, tax returns for five years, insurance, existing loan documents, service and union contracts, copies of all appraisals, payroll registers and utility and tax bills.
The Result
No matter the time it takes, you should have enough knowledge of the property to give you a clear picture of the physical, legal, and, in the case of a commercial property, its financial condition. The time it takes to get a true knowledge of your investment is worth whatever effort it requires. Remember, once you have bought it, it belongs to you, and if it isn’t worth what was paid, it is still yours.
