Due Diligence

DUE DILIGENCE: Reasonable steps taken by a person in order to satisfy a legal requirement, esp. in buying or selling something.

CONTINGENCY: A future event or circumstance that is possible but cannot be predicted with certainty. A provision for such an event or circumstance.

Due diligence and contingencies takes up a good deal of my time, as they are a crucial part of every real estate transaction. If you are buying a property, due diligence and contingencies will also become part of your life for a prescribed time period. I have a new motto in life: No one gets out of life alive. It is also true that, despite your best efforts to assess, inspect, and investigate a situation, things just have a way of happening. Whenever possible, it is best to minimize your risk and exposure, which is why due diligence and contingencies are vital.

Purchasing a home is, for most people, one of the most important decisions of their lives. It affects your heart, your family, your lifestyle. It represents a tremendous investment of capital and hope for the future. It is important to know what you are buying. Is the property within a Homeowner’s Association? Does this association function well or are there pending lawsuits and/or contentious meetings? Is the title to the home free and clear, or are their liens and easements that may affect you? What about Mineral Rights? Do they matter? Should they be a concern? These are a few examples of items addressed during due diligence.

A Montana REALTOR’S® Buy/Sell Agreement is a standard contract that includes numerous contingencies with agreed upon dates in which the buyer is to conduct their property investigation that covers a wide range of considerations. A buyer is able to terminate a buy/sell, and have their earnest money fully refunded without recourse if, during the contingency time frame, something can not be resolved to the buyer’s satisfaction that has been “checked-off” and designated in the original Buy/Sell. I tend to write in the phrase: And all other inspections deemed necessary by the buyer in the “Other” section after the laundry list of inspection contingencies. I want to cover all bases in case, during due diligence, something not yet considered comes up on the radar screen. Remember: Buyer Beware.

Items such as financing a loan, appraisal, and insurance coverage are fairly straight forward. Other items including covenants, home inspection, assessing a potential flood plain or the general health of a forest on the property requires due diligence. This, in turn, often involves hiring a specialist. Your REALTOR® should be able to advise you as to whether or not they feel a specialist is warranted. Your REALTOR® should supply you with a list of professionals that they have determined are qualified, reasonably priced, timely, and professional. The buyer either directly hires the specialist or asks the REALTOR® to decide who is best for the situation, schedule the services, and contact the buyer. It is always the buyer’s responsibility to pay for the work. The REALTOR® should be able to offer an estimate of what the costs generally are if there are no extenuating circumstances.

As a buyer, part of your decision on which REALTOR® to use should include a consideration of their expertise and knowledge of the local market, their relationships with professionals who work within the real estate field as inspectors, lawyers, well drillers, etc., their knowledge of potential concerns or problems in the area (for instance, in Gallatin Valley, radon should always be part of the inspection process), and their ability to keep focused on moving your contract to a successful closing. Your agent should be protecting and advising you as well as clearly explaining why they feel you should—or should not—invest in a specialist. For instance, why pay for a mineral rights search in a mature subdivision within city limits?

During the buy/sell process, there should be an open line of communication between the buyer and their agent. The buyer’s agent will convey any concerns, problems, adjustments, and questions to the seller’s agent. It is easy, when a real or potential problem is identified, for either party to become confrontational or emotional and to become stressed. It is at these times that the agents have a responsibility to clearly explain the situation to the best of their ability and within the responsibilities of being a REALTOR®. Your agent will help determine if another specialist needs to be consulted, if an amendment to the contract should be written, whether to request financial consideration from the seller, or if you, the buyer, should terminate the contract. With or without your agent’s approval, as a buyer, you have the right to terminate a buy/sell during due diligence for something not meeting your standard or expectation as long as it is documented.

As a buyer, you want to feel confident your agent is working for you to address and resolve due diligence and contingencies. One of the most critical steps in the buying process is to take the time to research and hire the best possible REALTOR® to represent you. And, with this in mind, there’s a reason to call me if you are looking for Christie’s quality property in Gallatin Valley.