What Happens During Due Diligence When Buying a Home?

Due diligence when buying a home is the period leading up to closing — when the buyer is conducting research on the property, neighborhood, and the home-buying transaction process.

The process of due diligence when buying a home occurs between the initial contract and the final closing of the purchase. Due diligence also includes all of the steps of the escrow process, after the buyer has made an offer and is working toward closing.

Buyer’s Guide to Due Diligence When Buying a Home

Due diligence when buying a home gives buyers the opportunity to learn about a property and determine whether or not it is a good investment, as well as prepare themselves for the home buying process.

Here are five things that buyers should do to conduct thorough due diligence when buying a home.

#1. Review Local Real Estate Laws

Whether you're a first-time home buyer or a current homeowner, learning the current real estate laws in your local area is important for anyone approaching a property purchase.

You can speak with your agent about real estate laws in your area. Buyers should talk to their agents about their ability to back out of a purchase, as well as what contract contingencies are necessary to protect your interests as a buyer.

#2. Prepare Your Budget and Credit

Understanding what you can afford to spend on your new home will ensure that you’re prepared to cover the upfront costs of buying a home — such as the down payment and closing costs — as well as the long-term expenses of mortgage payments, mortgage insurance, and property taxes.

When purchasing a home with a mortgage, buyers should invest time in strengthening their credit.

Higher credit scores can give borrowers access to preferable loan terms such as lowered interest rates, reduced down payment requirements, and omitted fees.

Remember to consider the hidden costs of buying a home, including:

• Moving costs
• Utilities
• HOA fees, if any
• Homeowners insurance
• Loan origination fees
• Property maintenance

#3. Conduct Appraisals and Home Inspections

Once your offer has been accepted by a seller, getting the property professionally appraised and inspected are crucial for protecting your position as a buyer.

Appraisal

The appraisal will determine the fair market value of the home. A certified appraiser will calculate how much the listing is worth based on an assessment of the:

• Location
• Property features
• Local real estate market activity
• Condition
• Design
• Amenities
• Property improvements.
  

Your mortgage provider will require a property appraisal to ensure that they are not lending out more than the home is worth.

Inspection

The inspection will reveal any hidden issues or defects within the home.

During a home inspection, a certified property inspector conducts a thorough walkthrough of the home and analyzes the condition of the home’s structure. The inspector creates an inspection report examining the:

• Foundation
• Walls
• Ceilings
• Roof
• Major systems (electrical, plumbing)
• Appliances
  

The inspection report includes recommendations for repairs or further inspections to follow up on specific issues, such as:

• A WDO (Wood-Destroying Organisms) inspection
• Radon gas inspection
• Defective drywall inspection
• Lead-based paint inspection

#4. Title Search

When you are ready to close on your home purchase, a title completes a title search and survey to determine if there are any standing issues with the property title.  Typically, title searches are provided by the escrow company managing your transaction.

This also reviews the history of the property, letting buyers learn more about the home they are buying.

Any outstanding liens or problems with the title that will impact the closing will need to be addressed before the purchase can finalize.

#5. Take Out an Insurance Policy For Your New Home

Protecting your new property is an important part of due diligence when buying a home.

It’s recommended to obtain multiple quotes for homeowners insurance policies with various providers. This will help you get the best deal and find the policy that best suits your needs.

Depending on how the property will be used, buyers should shop for specific types of insurance.

• Homeowners insurance covers fire, theft, natural disaster, property loss, and liability for buyers who will live in the home.
  
• Landlord insurance, also called dwelling insurance, protects the property and covers the owner against liabilities when the property will be rented out.
  
• Vacant property insurance protects homes against issues — such as fire, vandalism, and theft — that can occur when a home is empty for renovations or left uninhabited.
  

To learn more about the home buying process and helpful tips for conducting due diligence when buying a home, browse the RealEstateAgents.com Blog.