You put an offer on a home and it’s been accepted, now the due diligence period begins. In real estate, the due diligence period is the time between an accepted offer and closing. You can schedule inspections, review the title, secure an appraisal, and check for any red flags that could affect your decision to buy.
Whether you’re buying a home in Sarasota, FL, Wyckoff, NJ, or Carrollton, TX, this Redfin guide will walk you through what due diligence means for buyers, what typically happens during this phase.
What is due diligence in real estate?
During a real estate transaction, the due diligence period occurs after an offer is accepted but before closing. This timeframe grants the buyer permission to thoroughly inspect the property. It’s a crucial period to verify the property’s condition, ensure it meets expectations, and meet any financing requirements set by the lender.
In some states, buyers may also pay due diligence money—a non-refundable fee paid directly to the seller in exchange for this inspection window. While not required everywhere, it’s an important part of the process in certain markets and is separate from the earnest money deposit.
What is the difference between due diligence money and earnest money?
While both due diligence and earnest money are part of the homebuying process, they serve different purposes and are handled differently.
- Due diligence money is paid to the seller, usually non-refundable, and compensates them for taking the home off the market during inspections. This only applies in certain states.
- Earnest money is a good-faith deposit held in escrow that can be applied to closing costs or the down payment. It’s typically refundable if the buyer backs out for a valid reason like inspection or financing issues.
What happens in the due diligence period?
When buying a home, it’s important to gather all the details you need to make a confident decision. During the due diligence period, the buyer is allowed a set amount of time, typically outlined in the purchase agreement, to fully investigate the property before finalizing the sale.
Here’s what you can expect to happen during this stage.
1. Home inspection
Buyers hire a licensed inspector to evaluate the condition of the home, checking for structural issues, roof damage, plumbing problems, electrical safety, and more. Even if your lender doesn’t require it, it’s smart to hire a licensed home inspector to catch any potential issues.
If the home inspection reveals major problems, the buyer can request repairs, negotiate credits, or even walk away depending on the contract.
2. Home appraisal
If the buyer is financing the home, the lender will usually require a home appraisal to ensure the home’s value supports the loan amount. The home appraisal process is conducted by a licensed third-party professional who assesses the property’s market value based on its condition, features, upgrades, and comparable homes nearby. If the appraisal is lower than the purchase price, it can lead to renegotiation or an appraisal gap issue.
Buyers have options if an appraisal falls short:
- Renegotiate with the seller to lower the purchase price.
- Pay the difference out-of-pocket.
- Terminate the agreement, if the contract allows.
- Some buyers use an appraisal gap clause to specify how much they’ll pay above the appraised value.
>> Read: What is a Home Appraisal? How the Process Works
3. Title search and insurance
A thorough title search is essential to uncover any potential issues with the property’s ownership. This includes ensuring the seller legally owns the property and identifying any liens, encumbrances, or legal claims against it.
Title insurance offers an extra layer of security, protecting the buyer from financial losses due to unforeseen title defects that may surface later, such as undisclosed heirs or errors in public records.
4. Property survey
During the due diligence period, a licensed property surveyor is often brought in to define the exact legal boundaries of the property. The surveyor measures the land, marks property lines, and maps out the location of structures, easements, and any encroachments.
This detailed report helps identify any boundary or land issues that could cause problems later. For instance, a survey might uncover that a neighbor’s fence encroaches onto the property or that an easement limits where you can build—both of which could impact your plans or require negotiation before finalizing the sale.
5. Review of seller disclosures
Sellers are required in most cases to provide a written disclosure detailing any known issues with the property. Buyers review these documents learn about any pre-existing conditions or problems. The specific information included varies by federal, state, and local laws.
This review typically includes:
- Disclosure forms: These forms detail any known defects or issues with the property, such as leaks, structural problems, mechanical issues, or pest infestations.
- Property history: Information about past repairs, renovations, or insurance claims related to the property.
- Property boundaries: Documentation or surveys that outline the exact property lines, helping identify any encroachments, easements, or disputes with neighboring properties.
- Environmental hazards: Disclosures related to potential environmental issues like lead-based paint or asbestos.
- Neighborhood concerns: Any known issues with neighbors, noise complaints, or local community developments that might impact the property.
6. Homeowners association (HOA) rules
HOAs enforce community rules to certain rules in a specific area or neighborhood to ensure the safety and protection of residents. If the property is part of a homeowners association, you’ll receive documents outlining the HOA’s rules, fees, and responsibilities during the due diligence period. These rules can affect how you use and modify your home, so it’s important to review them carefully.
Common HOA regulations might include:
- Restrictions on exterior paint colors or home additions
- Landscaping requirements or limitations
- Rules about short-term rentals or leasing your home
- Pet restrictions or noise ordinances
- Monthly or annual fees for community upkeep
7. Zoning rules
Zoning regulations determine how a property can be used and may limit things like building height, additions, or home-based businesses. During due diligence, it’s smart to confirm that the zoning aligns with your plans for the property. For example, if you’re hoping to add a rental unit or build a detached garage, local zoning laws will dictate whether that’s allowed.
8. Homeowners insurance
Homeowners aren’t legally required to have insurance, but most lenders require it before approving your loan. Insurance costs and coverage vary based on the home’s location, age, and condition. For example, if the home is in a wildfire-prone area or has features like an older electrical system or a detached garage, you may need extra coverage beyond a standard policy to be fully protected.
9. Final decision
After completing the inspections and research, buyers decide whether to move forward with the purchase, renegotiate terms, or cancel the contract without penalty (if still within the due diligence window).
How long is the due diligence period?
The due diligence period typically lasts 7 to 14 days, but the exact length depends on your purchase agreement and local real estate customs. In some states, this period is clearly defined by law, while in others it’s negotiable between the buyer and seller.
For example, in North Carolina, the due diligence period is a formally defined part of the contract and usually lasts around 14 to 21 days, giving buyers time to complete inspections, appraisals, and other research. In contrast, California refers to this as the inspection contingency period, which is often set at 17 days unless adjusted in the contract.
How to prepare for the due diligence period
Getting ready for due diligence can help you move quickly and confidently once your offer is accepted. Here’s how to set yourself up for success:
- Line up your team early: Before your offer is accepted, find trusted home inspectors, surveyors, and other professionals you may need. This way, you can schedule them immediately during due diligence.
- Review important documents ahead of time: Take time to look over seller disclosures, HOA guidelines, and local zoning rules so you’re not caught off guard later.
- Understand key deadlines: Know how long your due diligence period lasts and mark important dates in your calendar to stay on track.
- Prepare your finances: Have funds ready for any due diligence fees, earnest money deposits, and potential repairs or credits.
- Make a checklist: Create a personalized list of inspections and research tasks based on your priorities and the property type.
- Communicate with your agent: Keep open lines of communication so your Redfin agent can help coordinate, answer questions, and advocate for you.
FAQ about due diligence in real estate
1. Is due diligence required when buying a home?
2. Can I skip the due diligence process?
You can waive it, but it’s risky. Skipping due diligence means giving up key buyer protections, such as the right to inspect the home or back out due to serious issues.
3. How long is the due diligence period, and is it negotiable?
Yes, the timeline is often negotiable between buyer and seller. Some states have standard timeframes, so your agent can help you set the right terms.
4. What happens if issues come up during inspections?
You can negotiate repairs or request credits. In some cases, you may choose to back out—especially if your contract allows it.
5. What if I miss a deadline or want to back out later?
Missing deadlines could cost you your earnest money. After due diligence ends, backing out may also come with financial consequences.
6. Do I get due diligence money back?
Due diligence money is usually non-refundable since it shows you’re serious about buying. However, if major issues arise during inspections, you might negotiate getting it back or applying it to the purchase, depending on your contract. Always check your agreement carefully.
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