What is Due Diligence in Real Estate?

If you’re getting ready to buy a home, you’ll want to do your homework. Not all homes are the same. New construction, foreclosure, short sale, or traditional sales, they’re all different. So it’s important to exercise due diligence in your real estate hunt.

A SWOT analysis (which stands for Strengths, Weaknesses, Opportunities, and Threats) is an analytical framework by which businesses and people sometimes plan for the future. This helps when buying a house to identify key areas of concern or positive aspects of a potential home purchase. Using this method of real estate due diligence during your home shopping process can help you avoid pitfalls and maximize the potential of your home buying dollars.

Look for the strengths of the home

Consider things like location, proximity to amenities and curb appeal. These are classic strengths to seek out in a potential home purchase. In addition, you should compile a short list of home features that matter most to you. Then, prioritize this list as you shop for a home. Items to include could be location, number of bedrooms , layout (ranch, open floor plan, etc), square footage, and school district. 

Your short list of must haves should also contain no more than 5 items. This helps you compare the viability of each home you see without being overwhelmed by all of its features. The short list shouldn’t include items like paint color, granite counters or flooring. As these items are relatively easy to change.

Be aware of the weaknesses

Weaknesses in a property can be harder to spot at first glance. But due diligence in real estate often reveals even the most ideal home has a weak spot somewhere. This may include distance to neighbors, high HOA fees, a lengthy work commute, limited closet space or other interior concerns. Overall condition, although not a very specific criteria, can be a definite weakness. If the home is in need of numerous repairs and you don’t have the cash or time to make them, the home in question has major weaknesses. Even if the price is right.

So, once you’ve found a property you’re interested in buying and decide to make an offer, the first two items on your due diligence checklist is to order an inspection and an appraisal.

Inspection

Before you buy the property, a home inspection is an important step toward purchase. As a buyer, your lender may not require you to inspect the property in order to qualify for a loan. But most real estate agents will recommend you get an inspection if only for your protection. 

Home inspections are a great way to vet a home before you buy it. While the seller of your desired home may be trustworthy with good intentions, it’s always possible they overlooked certain disclosures. 

The worst thing that can happen after you’ve signed your closing papers is an unexpected major expense due to problems in the home that you weren’t made aware of before. That’s why a home inspection is so important. Thus, most realtors advise homebuyers to hire a home inspector when they’re looking to buy a home. 

Appraisal

An appraisal determines the value of a property. This is one of the most important steps in real estate due diligence. If you plan to take out a mortgage, lenders require an appraisal be performed. This ensures the property is worth what it’s selling for. Following an appraisal, if a property is not worth the sale price, the loan will not be approved unless the seller reduces the price to its value.

An appraiser and home inspector will both inspect the property, however the appraiser considers things like property size, lot size and location, upgrades, overall condition and compare other similar properties (“comps”) in the neighborhood. Having an appraisal done keeps sellers from attempting to inflate costs without value.

Search out opportunities

One person’s home weakness is another’s opportunity. If you are in a position to address the weaknesses of a home on your list, what is a detriment to someone else may offer loads of home equity potential for you. Buying a home with potential can offer an excellent return on your investment. But you must be willing to look past the rough to see the diamond this home could be.

Be aware of threats that could impact the home

Threats to your potential home purchase can be found in material defects in the home like asbestos, mold or radon. They may be future concerns like a major thoroughfare being built a stone’s throw from your backyard. Or unforeseen HOA expenditures resulting in homeowner assessments. While you can’t always head threats like these off at the pass, you can boost your knowledge level by doing your due diligence. Review HOA documents and if anything sounds like a forthcoming assessment, ask questions of the HOA president or representatives. Talk to the city to determine whether the rumors you may have heard about a new road or other construction project are true. And if there are environmental concerns in the area you plan to buy in, seek expert opinions on the topic.

If you buy a home on a floodplain, expect the possibility of a flood – and know the cost and coverage of the insurance your lender will require you to carry. Like any major investments, there are risks to homeownership. The best way to counteract these risks is to arm yourself with information. This way, you are prepared for future challenges rather than surprised by them. You should also perform a title search. 

Title search

Performing a title search before the final purchase of a property is essential to ensure you will receive the title free and clear of any defects in ownership. If the previous owner had work done on the house and failed to pay the contractor the full amount, there could be a lien attached to the property that must be paid before it can be sold. If the buyer isn’t aware of this lien, they could end up paying for the amount owed before the title can be released free and clear in your name.

After doing a title search, buyers should get the owner’s title insurance to protect from issues that may not have been discovered during the title search. Such issues may include, omissions in deeds, undisclosed heirs, forgery, or mistakes in records. Owner’s title insurance protects buyers from any unknown liens on the property that may arise after closing, in which the insurance company is responsible to pay.