04/12/2021
🏢Real Estate Vocabulary101📌
📍DUE DILIGENCE📍
✅A due diligence period of time may be included in the purchase agreement, which is a length of time given to a buyer to thoroughly evaluate a property, frequently by paying professionals to inspect the property, do tests, and so on, so that the buyer may make an informed decision. In order to avoid being considered in default of the contract, a buyer may be given the option to renegotiate the contract based on their discoveries, or even to terminate the deal within a defined time limit. Due diligence enables a customer to completely comprehend the product they are purchasing.
✅In a nutshell, due diligence entails gathering information regarding the property's physical and financial status, as well as the surrounding area. Due diligence can be thought of as "doing your homework" before making an offer and after your contract is approved.
✅The due diligence time is "boilerplate" or pre-defined in most residential real estate purchase contracts.
Some states have a 10-day period, while others have 15-day or longer periods. When a real estate contract is signed between buyer and seller, the clock starts ticking on the due diligence period. When escrow is initiated, the clock starts ticking on the due diligence period.
✅The buyer and seller can always agree to a different due diligence term than the one specified in the contract.
✅If you're buying real estate, though, committing to a short due diligence period may leave you with insufficient time to thoroughly research the property you're considering. If you need to extend the due diligence time and the seller refuses, your earnest money deposit may be forfeited if you decide not to proceed with the acquisition.
✔️Checklist for Real Estate Due Diligence✔️
The goal of real estate due diligence is to ensure that you are getting exactly what you pay for in a real estate transaction. If you don't like what you see, you can try to renegotiate the purchase contract's terms and conditions, or you can walk away from the sale and get your earnest money back in full.
A comprehensive list of items to include on a due diligence checklist may be found here. However, depending on the home you're buying, you might not need to go over each one:
⚈ Population and job growth
⚈ Household median income trends
⚈ Access to public transportation and amenities
⚈ Neighborhood and school rankings
⚈ Unemployment rate
⚈ Crime rate
⚈ Business openings and closings
⚈ New development activity that could help or harm your intended investment
⚈ Property value trends
⚈ Fair market rent trends
⚈ Percentage of renter-occupied households
⚈ Market vacancy trends
⚈ Gross rent collected
⚈ Maintenance and repair expenses
⚈ Utility expenses
⚈ Property management, leasing, and advertising fees
⚈ Insurance expense including past insurance claims, need for flood insurance, and the cost of homeowners and landlord insurance
⚈ Property taxes and potential increase due to change in ownership
⚈ Proof that any sales tax collected on rent has been remitted and is up to date
⚈ Physical property inspections including structural and mechanical, wood-destroying organisms, radon, and lead-based pain
⚈ HOA covenants, conditions, and restrictions
⚈ HOA financial reports including P&L and balance sheet
⚈ Review of seller financial statements including a copy of the seller’s tax return to verify income and expenses are true as reported to the IRS going back two or three years
⚈ Review of tenant file including the lease terms and conditions, deposit amount, tenant application, and background and credit checks
⚈ Copies of existing service contracts such as landscaper or current property manager
⚈ List of all outstanding invoice and proof of payment for all work recently done
⚈ Lien search to verify there are no existing worker’s liens
⚈ History of insurance claims on the property going back three years
⚈ Verification that property appraisal is for at least the contract purchase price if not more
⚈ Compare your pre-offer pro forma analysis to the seller’s reports to make sure the deal still makes sense
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