Does Due Diligence Go Towards Closing?
Learn how due diligence serves as a critical pre-closing phase, ensuring a secure and informed path to your property acquisition.
Due diligence is a key investigative period for the buyer in real estate transactions. While not part of the official closing, it directly shapes and facilitates a successful property acquisition. This phase allows prospective buyers to extensively research and evaluate a property before committing to purchase, ensuring informed decisions and a smooth progression toward the deal’s finalization.
Understanding Due Diligence in Real Estate
Due diligence in real estate provides the buyer an opportunity to examine the property and all transaction details. Its objective is to uncover any potential issues, liabilities, or concerns that might impact the property’s value or desirability before the buyer is legally bound. This investigation helps buyers understand what they are acquiring and mitigate unforeseen risks.
Key activities during this phase include:
Home inspection: Licensed professionals assess the property’s structural integrity, mechanical systems, and overall condition.
Appraisal: A licensed appraiser determines the property’s fair market value, which is important for securing financing.
Title search: This verifies clear ownership, identifies existing liens or claims, and ensures the seller can transfer ownership.
Seller-provided disclosures: Buyers review these for known defects or material facts about the property’s condition.
HOA documents review: If applicable, a review of financial statements, bylaws, and rules helps understand the community’s governance and financial health.
Financing contingencies: These ensure the buyer can secure the necessary loan approval to complete the purchase.
The Due Diligence Period
The due diligence process operates within a specific, contractually defined timeframe, occurring after an offer is accepted but before the final closing date. This period is a contingency in the purchase agreement, offering the buyer the right to withdraw from the contract without financial penalty, such as forfeiting earnest money, if unsatisfactory issues are discovered. The length of this investigative window is explicitly negotiated between the buyer and seller and stated in the purchase agreement, often ranging from 10 to 90 days, depending on the transaction’s complexity and local practices.
All investigations, inspections, and reviews must be completed, and all decisions are made, within this allocated timeframe. Should the buyer decide to terminate the contract based on due diligence findings, the contractual terms dictate the process for withdrawal, protecting their earnest money deposit. This structured period ensures buyers have adequate time to perform necessary checks, while providing a clear timeline for the overall transaction.
From Due Diligence to Closing
Once the due diligence period concludes and the buyer is satisfied, the real estate transaction progresses toward closing. The first step involves a formal contingency removal or waiver, where the buyer indicates satisfaction with the property’s condition and commitment to proceed. If issues were identified, negotiations for repairs, credits, or price adjustments would have occurred and been resolved, as findings can be used for negotiation.
Following the resolution of contingencies, the lender proceeds with final loan approval, contingent upon the property’s appraisal and a clear title. As closing approaches, the buyer conducts a final walkthrough of the property. This ensures the home’s condition has not significantly changed, agreed-upon repairs are completed, and the property is vacant and in expected condition.
Legal and financial paperwork, including deeds, mortgage documents, and settlement statements, are finalized by attorneys or title companies. The process culminates in the transfer of funds and ownership at the closing meeting, marking the acquisition’s completion.