Part One: Contingencies and Due Diligence: Buyer’s Side
Buyers and sellers in real estate transactions often think that once they are “under contract” with a buy-sell, they are home free. However, a savvy and competent Realtor will explain to you that the true work is just beginning. A real estate transaction is not over until the title company is asking where to deposit the proceeds and the title is either recorded or in process of recording.
Arriving at a buy-sell is, in many respects, the easy part. Between the signing of a contract and the closing date, there are many steps for both buyer and seller. Part One will discuss contingencies and due diligence from the buyer’s perspective. Part Two, coming at the end of March, will address the seller’s side.
As a buyer, it should be both informative and exciting to house hunt. The possibilities are endless, the future is yours for the shaping. Having hired the Realtor who is right for you, the process provides a clear overview of the current market as far as price, location, and inventory. You decide what suits your needs and with an expert negotiator, you reach agreed upon terms as far as price and financing, what conveys, dates, any special provisions, contingencies and due diligence. Every buyer should understand exactly what they are agreeing to within the buy-sell. The best time to negotiate a “deal” is while beginning the process, not while you are in the middle and contractually obligated to perform. It is vital that you have stated all contingencies and due diligence with firm dates that you and your agent feel are reasonable and you have defined the full scope of what you need to know about the property and purchase. Real estate contracts allow the buyer to negotiate this, and your Realtor should be both representing and protecting you.
Contingent: 1: liable but not certain to happen: POSSIBLE. 2: happening by chance: not planned 3: dependent on something that may or may not occur 4: CONDITIONAL
Due Diligence: 1: A period of time during a real estate contract in which the buyer may terminate the contract and have their earnest money refunded. 2: An obligation for the buyer to conduct and thoroughly investigate a property within the contract time frame to satisfy themselves that the property meets their needs 3: A time to uncover defects with the property and to negotiate a solution with the seller through an addendum or to terminate the contract.
In real estate, the primary difference between a contingency and due diligence is that with a contingency the buyer is generally relying on a 3rd party or an event to occur in order to close on the buy-sell. Contingencies include appraisal and financing, title insurance, property insurance, any special buyer required contingencies such as selling their existing home or receiving approval from the purchased property’s Home Owners Association for being able to build, and actual inspection of the property. If a contingency can not be satisfied within the time frame, and the time frame is not extended, the contract can be terminated by the buyer with no recourse by the seller.
Due diligence is the actual inspection process, and is considered a contingency.
Most buyers think of due diligence as “home inspection,” which is a critical component, but it is far from the only area a buyer should familiarize themselves with during their property investigation. Most buyers do far less due diligence than they can or should conduct. Along with actual home inspection, a buyer, with the advice of their agent, should determine which other specialists should be hired by the buyer to examine other aspects of the property, such a lawyer to review the contract, covenants, any easements, and zoning regulations. Along with professionals, a buyer is wise to be engaged in their own investigation into the neighborhood, including the schools, crime rates, whether registered sex offenders are close by, if developments are planned in proximity to the property, and what the risks are of wild fires, earthquakes, and other natural phenomena. buying a property is a large investment.
Remember: Buyer Beware
A Seller’s Property Disclosure is an excellent starting point. A buyer needs to read it carefully and ask for clarification on any disclosure that raises a red flag. Independent verification and inspection is vital as even the best intentioned and ethical seller may not be aware of radon levels in the basement, or that there is a slow leak in a mechanical room that has caused mold in the wall. Your Realtor should provide you with choices and recommendations in hiring a home inspector. The inspector works for the buyer and will meet with the buyer at the conclusion of the inspection in order to walk through the home and clarify any areas of concern. They also provide a detailed report which is the basis for an Inspection Report between buyer and seller. Many times these reports are well over 50 pages, involving terms and systems beyond a layman’s general knowledge. The findings need to be discussed and fully explained. The findings help determine if additional specialists should be hired for further inspections. A good example of this is that the home inspector finds evidence of water damage in a ceiling. Do you need to hire a roof inspector, which is beyond the scope of most home inspectors? If issues surface that require more time to address, the buyer’s agent will prepare an addendum requesting an extension of the due diligence time frame. Legitimate requests are generally accepted.
Buyers need to grill their agents about the neighborhood and what the agent knows about any surrounding properties. Is a hayfield about to become 70 plus houses? The agent has an obligation to divulge any information they know that adversely effects the property, which can, with some agents, lead them to purposefully not wanting to know. (A real estate form of “Don’t ask, don’t tell.”) When asked by a buyer, they now have a professional requirement to truthfully answer questions that may not adversely effect the property value but will effect your enjoyment of the property. Real estate agents are not lawyers, water right experts, or home inspectors. At the same time, Realtors are there to assist, direct, and aid in due diligence within their expertise, professional ethics, obligations, and standards.
A wise buyer will take the time to talk to the president of the Homeowners Association if one exists and find out if there are proposals to increase the HOA dues or to undertake a major project within the HOA. It’s worthwhile to read minutes from previous HOA meetings and find out if the HOA has been involved in past lawsuits.
If a buyer is planning on building or remodeling a home, due diligence includes researching zoning regulations, covenants, Home Owner Association Design Review documents, talking with the head of the HOA architectural review board, and satisfying themselves through discussions with a builder that it is possible to build what is desired within budget and time frame.
Issues uncovered during contingencies and due diligence are open for further negotiation. If the buyer does not wish to terminate, they can, through inspection reports and addendums, request that dates be changed or that the seller either fixes a specific problem discovered during inspection or gives the buyer a credit at closing. The seller has the right to say yes or no. Your agent should be fully versed on any problem areas and possible means of reaching an amicable solution.
This time period is critical and it is the responsibility of the buyer to understand their responsibilities in conducting the investigation of all aspects of the property. The first step, in insuring a successful transaction, is to hire a real estate agent who is diligent and is focused on digging deep, uncovering potential problems, and arriving at solutions in your behalf.