Whether you are looking to buy a property for residential, investment, or commercial purposes, a due diligence real estate checklist will come in handy. There is a lot more that goes into due diligence than physically inspecting the property – and even that can be tricky for first-time homeowners and investors.
Lucky for you, we at the Cueto Law Group have your back. Here is everything you need to know about due diligence in real estate transactions.
Table of Contents
Toggle- What Is Due Diligence in Real Estate? Our Definition
- What Is a Due Diligence Period in Real Estate?
- What to Do During Due Diligence Period
- Due Diligence Home Buying Checklist
- Property Investment Due Diligence Checklist
- Commercial Real Estate Due Diligence Checklist
- Need Help with Residential or Commercial Real Estate Contract Breaches or Reviews in Florida?
- Real Estate Due Diligence Process FAQs
What Is Due Diligence in Real Estate? Our Definition
Before we get into the nitty-gritty, we need to define due diligence in real estate. So, what does due diligence mean in real estate? Due diligence in real estate transactions can refer to a couple of different things. Inexperienced buyers often mix up the two, which leads to unnecessary confusion and may even cause them to lose money.
On the one hand, “due diligence” refers to the due diligence period that starts once the contract has been signed by all parties. On the other hand, the term also denotes the due diligence checks buyers carry out during that period, including physical, financial, and legal inspections of the property.
What Is a Due Diligence Period in Real Estate?
The real estate due diligence period is one of the most critical steps of the buying process. During this period, the buyer can back out of the agreement without losing the money they have paid so far, incurring a penalty, or facing potential litigation or real estate mediation.
The due diligence period starts once both the seller and the buyer (and any other involved parties) have signed the contract and agree to its terms. At this point, the contract becomes legally binding, but you still have a window of time during which you can change your mind penalty and cost free.
The typical due diligence period length is ten days from the binding date. The binding date is the date on which the last signed contract is delivered and when the contract becomes legally binding. However, the parties can negotiate a shorter period if they want to finalize the transaction sooner. The exact length of the due diligence period will be specified in the contract, so make sure to read the agreement carefully.
What If You Cannot Complete Due Diligence in the Agreed-Upon Timeframe?
If you cannot finalize due diligence during the initially agreed period, you can negotiate with the seller to extend the deadline. Alternatively, you or the seller (or both) could decide to cancel the contract and move on. If you walk away at this stage, you will get your earnest money back.
What to Do During Due Diligence Period
Many first-time homebuyers believe all they must do during the due diligence period is to physically inspect the property. While physical inspections are a must, they are just one aspect of a much more complicated process that also involves various legal and financial checks.
In the sections below, we explain the steps of the due diligence timeline in more depth.
Due Diligence Home Buying Checklist
Unlike investors or business owners, the average person only buys real estate a few times in their life. They do not have the experience or knowledge of more seasoned buyers, making it easy to end up with a less-than-optimal deal.
The good news is that homebuyers enjoy various legal protections. For instance, sellers in residential transactions must disclose known material defects. That said, you should still do your due diligence when buying a house or an apartment very carefully.
To help you out, we put together this home buying due diligence checklist. However, keep in mind that this is just a guide to give you a better idea of what to do during the due diligence period. To protect your interests, consider working with an experienced attorney from the Cueto Law Group who will advise you on the best way to approach the due diligence process.
Physical Due Diligence
You should inspect both the interior and exterior of the property, including:
- Neighborhood: Check the property out at different times of the day and on different days of the week. This will give you a better idea of the local area. If possible, try to also speak with the neighbors and ask them if there is anything you ought to know.
- Environmental conditions: Research the local weather and microclimate, paying special attention to the amount of sunlight the property gets.
- Land conditions: These include soils, slopes, drainage, wetlands, and flood plains.
- Structural integrity: This requires an expert inspection of the building’s structural load and any deformations, fractures, or collapsing in the roofing, floors, walls, or other parts of the property.
- The general condition of the property: Make sure the property is clean, well maintained, and that there are no pending repairs.
- Building systems: Check that the electrical, heating, HVAC, and plumbing systems are all working properly.
- Equipment: Request an inventory of any furniture, fixtures, and equipment that come with the property and ensure that everything is in good condition.
- Potential hazards: Is the property at risk of fire, floods, earthquakes, pests, or hazardous substances? If so, you may want to reevaluate the agreement. Keep in mind that hurricanes and flooding are significant risks in certain parts of Florida.
- Encroachments: If there are any sheds, plants, trees, or other structures encroaching from neighboring properties, get them removed before finalizing the deal.
There is a lot more that goes into physical due diligence, so it is generally best to arrange for a formal property inspection by a licensed professional.
Legal Due Diligence
Legal due diligence entails examining the property’s documentation, including:
- Title: Make sure the seller has a clear title they can transfer to you. To find out the current owner of the property, get a preliminary title report from the title company. You should also ask your attorney, “What is a warranty deed?” and insist that you get one. A warranty deed is a legal document pledging that the seller holds a clear title to the property with no encumbrances, easements, outstanding liens, or mortgages against it.
- Seller disclosures: In Florida, real estate sellers must disclose known facts that materially and adversely affect the property’s value and are not readily observable by the buyer. You will get these once you open escrow on the property.
- Homeowners Association (HOA) documents: If you are buying a property with an HOA, get a copy of the applicable Declaration of Covenants, Codes, and Restrictions (CC&Rs).
- Regulatory compliance: Check that the property is compliant with local building and fire codes, Florida Real Estate Commission rules, and any other regulations that may apply.
- Property rights: If the property is in a rural area, check the status of water and mineral rights.
- Crime stats: Look up local crime rates and the sex offender registry and see if you are comfortable with what you find out.
- Zoning: Ask the local land and zoning department for the current 10-year plan. You need to know what potential developments and building plans to expect in the future, as these could affect the value of the property.
Financial Due Diligence
Financial due diligence involves verifying financial disclosures provided by the seller and running an in-depth cash flow analysis to see whether the economic benefits of homeownership outweigh the costs, including taxes, insurance, repair and maintenance expenses, and mortgage interest rates.
Things to look into include:
- Financing: If you are considering taking out a mortgage, shop around for lenders and see how much you could realistically get.
- Insurance: Homeowners insurance is mandatory if you plan to finance the property, so be sure to take that into account as well. You should also request an insurance claim report from the seller’s insurer to check if any claims were made on the property.
- Repair and maintenance quotes: Ask the seller for an estimate of projected repair and maintenance works. This could reduce your purchase price or the closing costs. Alternatively, the seller could agree to cover some or all pending repairs.
- HOA financial statements: These help confirm that the HOA is properly managed.
- Property appraisal: Get a formal appraisal by a licensed professional, which will compare the value of the property to that of similar properties in the local area.
Property Investment Due Diligence Checklist
Real estate investment due diligence is residential property due diligence with extra steps.
All of the above steps apply here as well, with the addition of a few considerations that help protect the interests of prospective landlords and investors.
So, be sure to read our rental property due diligence checklist together with our due diligence property checklist from the previous section. These apply whether you are a sole investor or working with one or more other investors as a real estate partnership.
Physical Due Diligence
- Location: You want to be aware of any external factors that could bring down the value of your investment. Check out the local area for encroachments or other issues and compare surrounding property values. This is especially important when buying a multifamily home or a property in a shared building.
- Neighbors: Talk to the neighbors and try to gauge whether they are likely to file unreasonable complaints against your future tenants or engage in other types of antisocial conduct.
- Parking: Prospective tenants are going to want a property with adequate parking. If your property has only one parking spot – or none at all – that could be a problem.
- Environmental issues: Be sure to conduct environmental tests such as mold, asbestos, and termite assessments. Mold often hides behind walls, resulting in tenant complaints and costly renovations down the line. You should also look for environmental issues in the local area. Check historical weather data for patterns of floods, tornadoes, hurricanes, wildfires, or drought.
Legal Due Diligence
- Town and municipal rules: Confirm that your intended use of the property as a rental complies with all relevant town and municipal rules.
- Zoning: Look into current and planned developments in the area to gauge how secure your investment is. For instance, condos or commercial developments planned nearby may increase competition in the future.
- Easements: Check whether there are any easements on the property, especially if it is in a multifamily unit.
- Sex offender registry: Prospective tenants are likely to check the sex offender registry when deciding whether to rent your space. You want to know who your neighbors are and whether they could bring the value of the property down.
- HOA rules: Most condo and apartment units are bound by HOA rules. Some HOAs are very strict about renting units and impose various rules, such as limiting the number of guests allowed at any given time.
Financial Due Diligence
- Landlord insurance: Go ahead and compare different providers for landlord insurance to find the best deal.
- Landlord tax deductions: Work out what deductions you may be eligible for if you rent the property out.
- Value projection: Contact a few different real estate agents or mortgage lenders and request a valuation assessment for the property. An undervalued property puts you in a great position to make a low offer and land a bargain.
- Rental demand: What is the current rental demand for this property type in the area? Make sure that the demand is high enough to generate a good return on your investment.
- Rent estimate: Set a rent estimate for prospective tenants based on the property’s value, rental rates for comparable properties in the area, rental demand, and your projected expenses.
- Cash flow analysis: Run a cash flow analysis based on your expenses and expected income from the property.
Commercial Real Estate Due Diligence Checklist
Florida law applies the so-called buyer beware doctrine to commercial real estate purchases, which shifts the burden of discovering latent property defects onto the buyer. For the most part, the seller is not required to disclose known defects that could negatively affect the property’s value.
As a result, thorough due diligence prior to closing a sale is paramount. Before finalizing a Florida commercial real estate contract, be sure to go through our real estate compliance checklist below. Again, all of the steps from the residential and investment property due diligence checklists above apply.
Physical Due Diligence
- Multidisciplinary property inspection: A commercial property inspection cannot be left to chance. To ensure that you make a sound investment, you should assemble a team of professionals, such as architects, engineers, property managers, brokers, general contractors, site consultants, and anyone else you deem necessary.
Legal Due Diligence
- Acquisition documents: Review and confirm that you are happy with the purchase contract and any acquisition documents, including escrow agreements, corporate authorizations and approvals, and disbursement instructions.
- Tenant and lease reviews: Check any leases to confirm the building’s occupancy. If applicable, confirm and arrange for transfers of tenant security deposits.
- Litigation and other legal matters: The seller should disclose all actual or pending litigation and give you access to the litigation files. Review these carefully to assess the legal risks that come with the property.
- Regulatory review: Ensure that the property is not subject to environmental or other regulatory actions.
Financial Due Diligence
- Financials: Have your accounting and finance teams analyze the property’s historical financial performance, capital improvement expenses, maintenance and utility bills, and pro forma projections.
- Insurance: Review existing insurance policies and compare them with quotes from alternative carriers.
Need Help with Residential or Commercial Real Estate Contract Breaches or Reviews in Florida?
Real estate transactions are complex, protracted, and rife with potential pitfalls. There is a lot that could go wrong, and you face a real risk of losing your hard-earned money even if you follow our due diligence real estate checklist closely.
To best protect your interests and your investment, partner with experienced Florida real estate lawyers from the Cueto Law Group. Our team has decades of combined experience supporting property buyers and sellers in making sound financial decisions and maximizing their ROI.
Contact us today for a free consultation.
Real Estate Due Diligence Process FAQs
Check out the answers to some common questions we get in our real estate practice:
What Are Due Diligence Documents in Real Estate?
Due diligence documents in real estate vary depending on the nature of the transaction (residential or commercial) and the depth of the due diligence inquiry. Common document types include zoning paperwork, land use and building permits, tax registration documents, power of attorneys, occupational and business licenses, litigation paperwork, and more.
What Does Buyer to Do Due Diligence Mean?
“Buyer due diligence” is the period after signing a contract for the purchase of real estate during which the buyer must inspect the property and decide whether they want to go forward with the transaction or walk away penalty free. Due diligence checks include various physical, legal, and financial inspections.
What Does No Due Diligence Mean?
Some buyers who are in a pinch may agree to perform no due diligence, meaning they agree to buy the property as it is. However, this is generally not recommended. Due diligence checks exist to protect your interests as a buyer, so you should take full advantage of them.