What is Due Diligence in Real Estate?

ByIsidora Alimpic
February 24,2022

What is due diligence in real estate? Many struggle to find the answer to this question, especially those who don’t have much or any experience in home buying. It’s a well-known fact that there are plenty of steps that need to be taken before the final contract is signed. But what exactly are those steps and how to go about performing them is an entirely different story. Due to this, we’ve decided to create a simple guide that’ll hopefully make this a far less intimidating and stressful process. 

What is Due Diligence in Real Estate?

Due diligence in regard to real estate can be defined as thoroughly researching the property in which you are interested. Shopping for a house or office space involves high stakes, so no detail should be overlooked. Therefore, aside from performing the standard inspections and appraisals, you should always do your homework, and that means doing some investigating on your own. 

We have to mention that some experienced real estate investors choose to skip certain parts of due diligence, which is fine since they have the knowledge to do so. However, those purchasing their very first home or trying to get into the business of property investing should carefully follow a real estate due diligence checklist, such as the one we’ve prepared below, and resist the urge to rush any of the listed tasks.

Due Diligence Checklist for Buying Real Estate

Shop around.

House hunting may be interesting at first but it can get quite tiresome after a while, causing some to look at a minimal number of options. Without seeing as many properties as you can, you can’t be certain that your final decision is the best one you could make. Also, keep in mind that it’s pretty easy to get the wrong impression of the real estate market by looking at homes in a single area. 

Investigate the surroundings.

Our next piece of due diligence real estate advice concerns analyzing each and every neighborhood thoroughly. You can learn a lot about a property’s value from its surroundings. The area’s demographics, the state of the homes in it, and crime rates can tell you if the value of the real estate you’re interested in is going up or down. 

Organize inspections.

Once you’ve done your own research, you should call in the professionals, experts who can spot potential problems you may not be able to. There are many types of inspections and, depending on your budget and due diligence deadline, you should try to organize as many of them as possible.

Here are the most common types of inspections:

  • General inspection: A general inspection report should include information on the state of the walls, floors, staircases, roof, heating and cooling, foundation, porches, plumbing, electrical installation, and the like. These inspections are only visual and are required by most lenders.
  • Wood-destroying organisms inspection: Some lenders will also ask for a WDO home inspection. The inspector should tell you if the structure has any wood rot caused by either termites or moisture and how severe the damage is. Even if your lender doesn’t request it, we suggest you don’t skip this real estate due diligence task as wood rot-related repairs can be costly.
  • Lead-based paint inspection: This type of inspection is mandatory for any house built before 1978. If the seller knows that lead-based paint has been used in or outside of the home, they are obligated by law to inform you about it.
  • Radon gas inspection: Not many people know that a radon gas inspection even exists, but if you have the time and money, we would definitely recommend that you have it done. According to the United States Environmental Protection Agency, radon, a radioactive gas, causes thousands to get lung cancer every year. Therefore, although a radon test usually isn’t a part of a typical real estate due diligence process, you might want to consider it.
  • Defective drywall inspection: Another rare inspection is the defective drywall test. It’s used to determine whether or not a home was built with defective drywall, which was manufactured in China, imported to the US, and used in construction between 2001 and 2009. Not only do the high levels of sulfur in the contaminated drywall affect the quality of the structure but they can also lead to respiratory health problems. 

Arrange appraisals.

If you’re planning on obtaining your funds through a crowdfunding platform or from a bank, you should expect the lenders to request an appraisal. Even those who don’t plan on taking out a loan should think about adding an appraisal to their due diligence real estate checklist because it determines the realistic value of a property and, as such, can keep a seller from attempting to inflate the property’s price.

Compare rates.

When looking for property financing, you mustn’t forget to take the time to compare interest rates from multiple lenders. The first few offers that you get may turn out to be similar, but don’t let that stop you from exploring further. In the long run, even the smallest of differences could end up saving you a good amount of money.

Assess the property’s eligibility for insurance.

Before your due diligence deadline passes, you should make sure that the property you intend to purchase meets the minimum standards of insurance companies. There are three main types of insurance that we’d like to mention here:

  • Homeowners insurance: If you plan on living in the property you bought, you should consider getting a homeowners insurance policy. It protects both your home and the assets inside it from unforeseen circumstances such as tornadoes, fires, or thefts. Your insurance rates will be higher if your property is, for instance, old or in a flood zone, so keep that in mind during your property due diligence assessments.
  • Landlord insurance: No matter how careful you are when screening your potential tenants, accidents happen, which is why we’d advise all those intending to rent their properties to buy landlord insurance. This type of coverage provides financial protection if your property is damaged, becomes unavailable due to a catastrophic event, or if someone gets hurt while living in or visiting it.
  • Vacant property insurance: Vacant property insurance is typically the most expensive of the three, but if you’re planning on flipping a property, you might want to look into getting this kind of policy. Empty homes are at high risk of theft, vandalism, and fire.

A key part of due diligence in real estate is doing a title search. During this process, public records and other documents relating to the property are examined to determine the property’s legal ownership and if any lines or claims are associated with it. If you fear that your title search might not uncover every single issue, you might want to think about purchasing title insurance. Title insurance covers disputes that occur both during and after a sale. 

Check the restrictions of the homeowner association. 

Owners of properties located in communities managed by homeowner associations have to follow the rules these organizations make and enforce. Whether you’re conducting residential or commercial real estate due diligence, you should remember to check what these rules are. Although this may not seem like a very important step to you, know that some HOAs impose extremely strict requirements, which you may not wish to adhere to.

Consider getting some assistance.

Navigating the home buying process and all the paperwork that comes with it shouldn’t be taken lightly, especially if you’ve never done anything similar before. To avoid getting overwhelmed, you might want to consider hiring a real estate attorney. Note that online legal firms tend to be more affordable than their brick-and-mortar counterparts.


As you can see, the answer to the question of “What is due diligence in real estate?” is quite a long one. If, while reading it, you felt like there was far too much to remember, there are some great free task management apps you could download to help you keep track of everything.

FAQ
Can a buyer walk away at closing?

You are free to back out of buying a property at any given time before signing all the closing paperwork. However, if you do so, you’ll most likely lose your earnest money, which is the money you put down as a kind of deposit to show that you are serious about purchasing.

Can you walk away after due diligence?

Although you will lose both your due diligence money – a fee paid for the negotiated due diligence time that isn’t refundable but can be credited to the buyer at closing – and your good faith deposit, you can walk away from purchasing a property during the time between the end of the due diligence period and closing.

How long is a typical due diligence period?

A due diligence period usually lasts about 30 days. However, this time frame can be, and often is, customized to better meet the needs of either the seller or the buyer.

What do I need to do during due diligence?

The main tasks you’ll need to take care of during the due diligence period involve examining, inspecting, and assessing the property. Read our “What is Due Diligence in Real Estate?” article if you’d like to learn more about the responsibilities of potential home-buyers.

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MLSs are networks that enable brokers and agents to exchange data about properties for sale.  Your own website: Out of all the things we’ve listed so far, building a website isn’t among the most important conditions you need for a successful open house. However, if you’re planning on further pursuing a career in real estate, you should definitely think about it, especially considering the fact that, nowadays, there are numerous affordable and easy-to-use website builders available, such as Wix and Squarespace. Video sharing websites: More and more agents have begun filming video tours and posting them on YouTube and similar sites. It may seem counterintuitive, but giving people a preview of the property could actually get them to come see it in person. In addition to the internet-related advertising methods, you can also print open house flyers and distribute them at gyms, grocery stores, and large workplaces, and put up a “For sale” sign in front of the property. Be a Good Host You’ll need to be both friendly and professional. Keep in mind that your goal isn’t to make the property seem perfect - there’s no such thing - but to point out the features that make it stand out from the competition. After you’ve shown the buyers around the home, be prepared to answer any questions they may have about it and leave them enough time to explore it independently. In addition to that, try to find out about other open house listings they are looking at. You should remember to put out some refreshments as well – cookies and bottled water are the safest options. Some agents serve alcohol to get a better turnout, but we'd advise against that, since your focus should be on attracting serious customers, not anyone who just wants to take advantage of the free drinks. Lastly, make sure that every visitor fills out the sign-in sheet. Their contact information is vital for the next step in this “How to Do an Open House” guide. Stay in Touch You should never forget to send a “thank you” email or text to the people that visited your open house. Not only is it polite, but it will also enable people who may not have picked up one of your flyers or descriptions to get in touch with you. The message should include a link to your web page or ad. During the following week, you should call every one of your visitors and ask them if they are interested in the home and have any additional questions about it. If they are disinterested, thank them for stopping by your open house showing and use the opportunity to hear their opinions on how you could make the property more attractive to future potential buyers. Those serious about a career in real estate can benefit from getting a good piece of customer relationship management software. In the beginning, you probably won’t need it as much, but as you gain more contacts, you’ll see that developing a relationship with them will get increasingly harder if you don’t enlist some help to keep track of all the information. When to Host an Open House? Scheduling your open house at the right time can make the difference between two visitors and twenty. People tend to have more free time on weekends, but the best time for an open house depends on the area in which the showing is being held. In metro areas, you don’t want to organize an open house too late in the day, since the heavy afternoon traffic will most likely discourage many from coming. You should be fine if you choose any time slot between 11:00 a.m. and 3:00 p.m. Setting a time in the suburbs is less tricky. Our suggestion would be to let people enjoy their mornings and host your open house between 12:00 p.m. and 4:00 p.m. Although it may seem like a fun idea, avoid the temptation of holding an open house on a public holiday. Few will want to go through the effort of finding the time to drop by. Another thing that you should remember is that you will almost certainly need to organize several open houses to get the best possible offers. When planning several showings, sticking to a schedule will help you keep track of everything you need to do and make things less confusing for your potential customers. Note that, unlike standard open houses, broker’s open houses are typically held midweek, since agents are more available during those days. Should You Hold an Open House? Now that we’ve explained how to host an open house, let’s discuss whether you should actually do it. Pros: Exposure: Open houses are a terrific way to publicize a property. They may not lead to a direct sale every time, but sometimes the hardest part of selling a home is making people aware of it. To help with that, you should make use of flyers and internet ads to attract attention to the actual event, and then put in plenty of open house advertising effort to maintain buyer interest while they’re on the property and afterward. Attracts inexperienced buyers: A lot of first-time homebuyers don’t know where to start their home-buying process, which is why they will commonly attend open houses to ask a real estate agent for advice, see what’s out there, and perhaps even learn from other visitors. Networking: Potential buyers aren’t the only visitors you should expect at your showing. In most cases, you’ll also find real estate brokers and agents there too. Not only can they offer you useful open house tips, but they might actually have one or several clients who might be interested in your property. Lack of pressure: During private viewings, buyers can feel pressured into making a purchase, while an open house enables them to explore the home in a relaxed environment. Keep in mind that, to create such an atmosphere, you mustn’t be trying to market the home too aggressively. Convenience: If you time your open house right, you could get plenty of potential buyers who just happened to be passing by at the time of the showing and see your open house sign. On top of that, not everyone is a huge fan of technology, and many people still prefer to experience things first-hand instead of through a virtual tour, for example. Cons: Time-consuming: Whether you’ve recently become a real estate agent or you’ve decided to sell your home on your own, keep in mind that marketing, preparing, and presenting a property takes a significant amount of time and research. Low selling chances: As we’ve already mentioned, many real estate agents don’t believe that open houses work. The truth is that most serious prospective buyers will usually opt for a private viewing instead of a group one. Security risks: Unfortunately, one of the main downsides of an open house event is that criminals often use them to explore a property without raising suspicion or being supervised. The odds of a post-open-house break-in increase in situations when the home is vacant. What’s more, you’ll have to look out for any attempts of theft during the event as well, as large crowds make it nearly impossible to find the culprit afterward. Hobbyists and curious neighbors: For some, occasionally visiting open houses is a kind of hobby, especially when high-end homes are concerned. While conducting your open house follow-up, you might also discover that some of the people you had met were just inquisitive neighbors who wanted to compare the property to their own. Obviously, none of these individuals will be interested in making a purchase, and they aren’t very useful as future contacts either.
By Isidora Alimpic · March 01,2022

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