The Due Diligence process consists of the buyer’s review of the seller’s disclosures and any home inspections the buyer wants to make regarding the property. These can include the following:
- The physical condition of the property;
- The determination of the existence of any hazardous substances, environmental issues or geologic conditions;
- Verification of the square footage or acreage of the land and/or improvements;
- The assessment of the roof, walls, and foundation; the condition of the plumbing, electrical, mechanical, heating and air conditioning systems and fixtures; the condition of all appliances;
- The costs and availability of homeowners’ insurance and flood insurance;
- The location of property lines; regulatory use restrictions or violations;
- Fees for services such as HOA dues, municipal services, and utility costs;
- Convicted sex offenders residing in proximity to the property; and
- Any other matters deemed material to the buyer in making a decision to purchase the property.
In other words, the purpose of the home inspection process is for the buyer to understand the condition of the property he or she is purchasing and to determine whether or not to go through with the purchase.
Here is what due diligence is not:
- It is not an opportunity for the buyer to reopen negotiations about the purchase price of the property.
- It is not an opportunity for the buyer to create a punch list of every tiny little defect, like a missing switch plate or screw, and ask the seller to repair each item.
- It is not an opportunity to ask the seller to replace appliances, furnaces, boilers or water heaters because they are old. (I never sell a property without a home warranty so if these older appliances fail, they are essentially insured.)
What if the Home Inspection Process Reveals Major Defects?
If the inspection reveals a major defect that buyer and seller could not have factored into the original negotiation, then it may be reasonable for the seller to repair the defective item so that it is functional. For example, I helped some buyers purchase a condominium and the water heater was leaking. The seller had to replace the water heater regardless of whether or not the sale went through.
I sold a home last year where the roof was visibly old but was not leaking. The purchase price took into account the age of the roof and the fact that it would need to be replaced within a few years. The seller made necessary repairs to extend the life of the roof.
If you are planning on selling your home, it may be a good idea to order a home inspection so you can address any maintenance items up front instead of in the heat of Due Diligence. At my brokerage, we order home warranties for all of our listings, so our sellers are covered for mishaps during the listing period.
If you are purchasing a home, factor the home’s condition into your offer. Even brand new homes are not perfect. The purpose of the Due Diligence process is for buyers to understand exactly what they are buying. It not to open up a second negotiation or for a seller to cure every minor defect within a home.
Skilled agent representation during the Due Diligence period can save sellers thousands of dollars in unnecessary repairs and can help buyers negotiate the repairs of major defects. What are your thoughts on the Due Diligence and home inspection process?