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  • What exactly is due diligence and how does it work?

    Thursday, February 1, 2024   /   by Amy Brown

    What exactly is due diligence and how does it work?

    Due diligence is a question that I get a lot and it's no wonder! It is an obscure second round of negotiations that doesn't have alot of rules, kind of like Fight Club (only not that bad, lol).

    fight club.jpg

    Due diligence occurs after all inspections have been completed and it is now the buyer's chance to ask for concessions. These can take numerous forms and structures so let's outline a few. Also, the manner of receiving concessions can be determined upon the type of loan that you are using so that can change things too.

    Let's start with the basics. 

    1. I go over the inspection report with you and we determine what issues, if any, that the home has that are important enough that you would like for them to be remedied right away. From a strategic standpoint, you do not want to turn the seller off by making a blanket ask of "everything on the report". North Carolina is not one of the states that says a home must be delivered in "perfect" or "near perfect" condition so it is prudent to choose your items wisely. You will want to ask for the big ticket items, such as roof repairs, plumbing, and electrical. You will want to exclude those things that can be handled by a handyman such as a broken door handle or a loose outlet. 

    I then create an itemized list referencing the inspection report and place that on the due diligence repair request agreement that you and the seller will sign off on. This then becomes part of the contract. 

    If repair items are the agreement, then the seller would be responsible for having those repairs completed prior to closing and the buyer would have the opportunity to re-inspect if they choose (at a charge) and to do a self-check at the final walkthrough. 

    2. In lieu of repairs, a buyer can also ask for a seller concession at closing. This would take the form of a credit in closing costs. If the amount of that credit is up for debate, then the buyer would need to have estimates completed by various contractors to get a definitive number on the cost of repairs. Whether estimates are necessitated may indicate a need for an extension of the due diligence period which is always something that can be asked for but must be agreed upon by both parties.

    In the case that a buyer is using an FHA loan for their purchase, the amount of seller concessions is limited to $6,000 so that will need to be taken into account depending upon the extent of repairs requested. If that number is projected to be more, then there are other ways to meet the needed amount through a reduction in the contract price.

    In a nutshell:

    Due diligence negotiations can be settled by:
    1. Repairs made by the seller's contractors prior to closing
    2. Monetary credit at closing through either seller paid closing costs or a reduction in the contract price.
    3. A combination of repairs, seller paid closing costs, and/or reduction in contract price.

    Regardless of which method is chosen, an agreement must be reached prior to the expiration of the due diligence period or else the earnest money would then become owed to the seller. If necessary, an extension can always be asked for in order to allow more time for estimates or negotiations, however, both parties must be in agreement to the amount of extension time.

    While some view due diligence as an unwanted hassle, I view it as a time for both parties to become comfortable with the terms and the transaction. Once due diligence negotiations are complete, then both parties can make their moving plans and feel more confident that we are moving on to closing.

    Have a wonderful day!