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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