Due diligence in real estate refers to the buyer’s responsibility of researching the property and being thorough in making the decision to complete the purchase. Buying a house is a major decision. It’s often the costliest investment of a person’s life. Before signing on the dotted line and becoming the legal owner of a property, go through the steps on this due diligence checklist. That way, you can complete your purchase in total confidence.
1. Study the Marketplace
Before you begin your search, gain a firm understanding of the real estate market in your desired location. You can do this by either calling a real estate agent, doing online research, or talking to an appraiser. Working with a local real estate agent is often the simplest way to get an idea of the type of market you’ll be buying into. An agent will have done the proper research to accurately gauge the appropriate price of the home. Heading to sites such as Trulia and Zillow can also give you an idea of the values of properties in the area.
2. Visit the Property
You’ve heard the term “lemon” in real estate – it’s a property that has a hidden defect you don’t know about until you’ve already completed the purchase. Avoid buying a lemon by conducting your own investigation into the state of the property. Do not simply believe the seller when he or she describes the condition of the house. Visit the home yourself, in person, and look around. Walk the property and see if everything is as the seller says it is.
3. Hire a Building Inspector
Part of the investigative process should be to invest in a building inspection. A professional inspection will help you assess the safety and strength of structural components like the foundation, walls, roof, and appliances of the home. It can also ensure the current owner did not misuse the property in a way that could create problems for the new owner. For example, if the house has a room added on that’s not up to building codes, it could be trouble for the new owner.
4. Check Zoning Laws
A common issue that crops up when purchasing a new property is a zoning violation. Contractors must be careful to obey zoning laws when building homes and businesses. A business cannot be run from a residential zone or vice versa. Confirm the zoning designation of your desired property, and make sure its current use complies with the rules. Consider current agreements that may affect the future of the property, such as public use agreements or growth management regulations.
5. Research the Title
Do not underestimate the importance of researching the title of a property before purchasing. Conduct an online records search for a simple, affordable way of looking into a home’s title. The title will include the legal owner of the property, the property’s legal description and boundary lines, real property, liens, encumbrances, usage rights, and more. You can gain access to a wealth of information about a home before you buy using the online public records database.
6. Access the Most Recent Land Survey
You can also use an online records search to uncover the most recent professional land survey on the property, if one exists. This will reveal vital information about the land, including legal boundaries, physical features, structures built on the land, mortgages, easements, and encumbrances. The most trustworthy land surveys come from the American Land Title Association (ALTA) or the American Congress on Surveying and Mapping (ACSM).
7. Get an Appraisal
Don’t pay too much for a property because you blindly trust the price that’s on the listing. Hire an appraisal to give you an unbiased, third-party estimate of the true value of the property. If you need to finance the property or purchase it with a mortgage loan, you generally need to hire an appraiser. Even if you’re paying cash, getting an appraisal is smart. Obtaining a reliable real estate valuation can ensure you don’t buy a home at an unreasonably inflated price.
8. Schedule an Environmental Assessment
Before you say yes to a property, invest in a professional environmental assessment. This will reveal any daunting environmental hazards or issues that exist on the property, such as a gas leak, hidden oil container, wetlands, or use of the property for manufacturing in the past. An environmental assessment can ensure the land on which your new home stands is safe for you and your family, and will remain that way for the foreseeable future.
9. Figure Out Financing
Once you’ve verified all the information you can about the property in question, it’s time to consider financing. Lender financing is a popular way to purchase a home. Unless you have the means to purchase a home in one lump sum, you will want to look into lender financing, typically in the form of a home loan or mortgage. Oftentimes, the bank or lender will conduct its own investigation of the property’s title and land surveys. Research multiple lenders and mortgage options to make sure you receive fair terms and interest rates.
Different types of mortgage agreements are appropriate for different people. First-time buyers, for example, may prefer mortgages with adjustable interest rates for lower monthly payments. Veterans and military members may qualify for special VA loans with better terms, as may low-income families with loans from the Federal Housing Administration. Choosing your home loan agreement will take a bit of research. Do the math on all your options and compare them for the best choice for you.
10. Consider Title Insurance
Check to see if insurance is available for the property’s title. You will need to purchase homeowner’s insurance, but title insurance is something entirely different. Title insurance can give you peace of mind as a buyer. It guarantees a clean chain of title and protects you, the new owner, from claims of validity. It allows you to avoid potential problems after you buy the house, including:
- Unpaid back taxes
- Pending legal actions against the property
- Old mortgages
- Forgeries
- Claims from heirs
Completing Your Due Diligence
The due diligence process is intensive, but it is well worth the effort to safeguard your investment. As the potential purchaser of a property, you deserve to have all relevant information about a home before you buy. Follow this due diligence checklist to complete the process completely and efficiently. Then, move into your new home with confidence!
