What Happens During the Due Diligence Period on a Residential Purchase?
Whether you’re buying or selling real estate, it is exciting to finally have a drafted and signed sales contract in your hand. But of course, something can still go wrong in the “due diligence period.” This is the period between signing the contract and the removal of the buyers’ contingencies, before actually closing the deal, during which buyers and sellers perform actions needed to complete the sale.
There are various contingencies which may be included in the sales contract. The contingencies discussed below are pre-written into the standard residential sales contract, unless negotiated out by the parties. During the due diligence period, difficulties in any of these areas can complicate the transaction.
Financing. Most buyers need to use some form of financing in order to purchase real estate. Sales contracts generally acknowledge this fact and include a contingency stating that the sale will not proceed if the buyer cannot obtain appropriate financing. The buyer is given a certain amount of time to secure financing. While it can be frustrating for sellers to lose a sale due to buyers’ inability to secure financing, there is generally no way to force a buyer to pay without financing. From the buyers’ perspective, obtaining a commitment for financing during the financing contingency period and then having the funding actually materialize are both potential issues.
Inspections. When a buyer makes an offer on real estate, the offer generally includes a contingency relating to inspections of the property. Since many problems cannot be seen with the naked eye, during the due diligence period the property is typically inspected by the buyer’s retained home inspector for issues such as foundation problems, issues with plumbing and electrical wiring, and so on. The agents also have an obligation to inspect, but they are not professional inspectors and should not be used as a substitute for a professional inspection. Often the seller will be given the option of repairing any problems so that the sale can then proceed, or providing a credit to the buyer to “fix” any problems uncovered. Typically the inspection contingency will allow a buyer to abandon the transaction if problems are discovered and an agreement to with the sellers to resolve the problems cannot be reached. Problems are typically resolved either by the seller issuing a credit to the buyer or remedying the problem.
If either the buyer or seller cannot complete necessary actions within the due diligence period, they can request an extension on those contingencies. The seller, however, can force the buyer to either remove the contingency or cancel once the contingency period ends. Disputes over contingency removal typically lead to fights over the right to the buyers’ deposit. Principals to a residential transaction should only consider litigation (usually preceded by mandatory mediation) after consulting with a skilled real estate attorney, who can advise the parties on their rights and an appropriate course of action.