What is the due diligence period?
The due diligence period allows investors and homebuyers to investigate and research the subject property before purchasing it to ensure that the investor knows exactly what kind of property is being acquired.
Why do due diligence?
The due diligence period is crucial for investors as this is their last opportunity to truly understand a property before acquiring it. Due diligence on a property can save an investor from acquiring a property with a lower return on investment than expected.
Things that can be discovered during the due diligence period
- Unaccounted repairs and maintenance
- Unfavorable zoning laws
- Environmental damages
- Inaccurate financial statements
Investors should know
Investors are given a certain number of days to do due diligence
If the seller denies a buyer’s requests to extend the due diligence period, the buyer could be at risk of losing their deposit if they don’t purchase the property
The due diligence period is negotiable
The due diligence period either starts when escrow opens, or the purchase and sale agreement is signed
What should investors analyze before the due diligence period?
Investors should perform a neighborhood analysis. This includes household income level, population growth, crime rate, safety score, school district rankings, chart property values, job growth. Investors should also perform a financial analysis. This includes rental income trends, vacancy rates, local property management fees, repairs and maintenance expenditures, tax rates, insurance rates, financing
What if the investor or homebuyer discovers an issue that wasn’t disclosed?
If the investor or homebuyer runs into an issue that wasn’t disclosed during the due diligence period, the investor or homebuyer has the option to either ask the seller to address the issue or cancel the contract. If the seller agrees to address the issues discovered, then the buyer should ensure that it’s all documented in an updated contract.