Thursday, August 30, 2007

D is for Due Diligence

Welcome to part four of my A-Z journey through real estate. Of course, this isn't a definitive glossary of real estate terminology, techniques, strategies or idea, but rather just a few answers to questions. Of course, for every question that gets answered, at least one new question is raised. I guess that makes it like most everything else.

Which brings me right back to Due Diligence. Simply put, Due Diligence is the process of gathering needed information about a property. Some of the information is volunteered, for instance the Seller's Disclosure. Here in GA, the sellers are required to disclose any defects of which they are aware, as well as past defects which may have been corrected. The beginning of the Due Diligence process would include reading the Seller's Disclosure to see if there is anything striking and/or disturbing. Keep in mind that if the seller properly discloses a property defect, the buyer is buying the property with knowledge that defect exists. If the seller were to not include a defect that is known to them to have existed on the property, they could still be liable to correct that defect, even after the sale of the property is executed.

The usual next step in the process of performing Due Diligence would be to have the property inspected by a certified. professional, competent home inspector. There may be issues which the sellers are not aware, or there may be issue which the sellers are knowingly hiding. The inspector's job is to locate these, and inform the buyer of their existence. In some cases, further inspection by a specialist might also be called for. A HVAC technician, electrician, or engineer might need to look at situations beyond the scope of a standard inspection. These specialists might employ techniques and technology not available to a regualr home inspector. Also, the vast majority of the time, an additional inspection needs to be performed to search out wood destroying organisms. These "termite inspections" (which look for a lot more than just termites) are usually required by banks if there is financing, and always a good idea.

Depending on the expected future use of the property, proper Due Diligence might also include checking county records to determine if a proposed use will be allowable. If one wants to convert the property to another type of zoning, or wishes to expand the living space, or add an addition, there might be restrictions from the city, county or subdivision. It is the responsibility of the buyer to determine this during their Due Diligence Period in the contract, if not before entering the contract. If there is a HOA (Home Owner's Association) or other governing board for the community, it is also the buyer's responsibility to get a copy of their Covenants, Conditions and Restrictions (CC&Rs) to review during this same period.

There may be many other questions which would need to be answered during the Due Diligence Period of the contract. Generally, finding these answers are the responsibility of the buyer and/or their agent.

There is one item which ISN'T done by the buyer or their agent, but is done on their behalf. That is the title search. It is performed by (or for) the closing attorney, on behalf of the seller and their mortgage company. The buyer generally pays for the mortgage company's premium for the resulting title insurance. I would add, that the buyer should almost always also pay for additional title insurance to cover themselves if a title problem arises. Problems are rare, but could be devastating.

Stay tuned for E...

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