How do we Navigate the Due Diligence Period?

According to the North Carolina Real Estate Commission (NCREC), the due diligence period is “an agreed-upon period of time during which the buyer can investigate the property and the transaction contemplated by the contract, terminate the contract for any reason or no reason, and receive a refund of any earnest money deposit.”

So, how do you decide the duration of the due diligence period? You will need to assess how long it will take to:

a)     To conduct any inspections of the property such as a home inspection

b)     To complete any negotiations for repairs with the seller (if the seller is interested in repairing the property)

c)      To obtain loan approval (if you are not a cash buyer) and results of an appraisal

d)     To be satisfied that you have found a buyer for a home you need to sell before closing on the new property

Once you have thought about all these factors, you will arrive at an ideal due diligence period. Prior to 2011, the Offer to Purchase and Contract (Form No. 2-T) included a loan contingency where the buyer was able to terminate the contract and have their earnest deposit refunded if the buyer did not qualify for the loan. Today, there exists no loan contingency or home sale contingency providing protection to the buyer.

Instead, the due diligence period allows the buyers to conduct their inspections and investigations and allows the buyer to terminate the contract for any reason. The buyer must terminate the contract in writing before the end of the due diligence period in order to receive a refund of any earnest money deposit, not the due diligence fees (if any).

If you decide that you may require an extended due diligence period of more than a month, the due diligence fee may need to be a higher amount to convince the seller to take the property off the market for an extended period. Please see my post on due diligence fees. Also, please note that you are not required to pay any due diligence fees. You are afforded a due diligence period even if you and the seller do not negotiate a due diligence fee.

In the unlikely event that you do not require a due diligence period, a date should be entered and space not left blank.

Now that your due diligence period has begun, I am hoping you will have already planned who your home inspector is and already provided all the relevant documentation to your lender for pre-approval. Speaking of your lender, I think best practice would dictate that you obtain a conditional pre-approval from your lender before you submit any offers. By doing this, two things happen: 1) you shorten the approval time, and 2) less stress that your loan won’t go through in time and you risk losing your earnest deposit.

Within Form No. 2-T, there exists a list of investigations a buyer should consider performing during the due diligence period. Here’s the list of activities:

a)     Loan Approval

b)     Property Inspections

c)      Review of Documents such as any restrictive covenants

d)     Cost of Homeowner’s Insurance

e)      An Appraisal of the Property

f)      Survey of the Property (for suitability for purposes)

g)      Zoning, Governmental Regulation, and Governmental Compliance

h)     Flood/Wetland/Water Hazard

i)        Utilities Availability

j)       Streets and Roads Investigations

k)     Existence of any Special Assessments

l)        Sale or Lease of an Existing Property

m)  Any Repair Negotiations (seller is not obligated to repair anything under the 2-T)

In rare circumstances is the due diligence fees refunded to the buyer unless the seller has been found to be in breach of contract. I think the main point of contention during the diligence period is the results of the home inspection report and whether the buyer will qualify for a mortgage. My advice is to obtain a pre-approval before making the offer and only submit an offer on a home you have asked sufficient questions about (e.g. the age of the roof or air conditioning, cost of insurance, average utility expenses). That way, there should not be major surprising during the home inspection or any investigations.

If you have any questions about the due diligence period, please reach out to me at cj@clairesells.com.