Due diligence is the research an individual or organization takes before a financial transaction to ensure they have a complete understanding of the potential investment. In real estate, this applies to purchasing a single-family or multi-family rental property.
With a real estate purchase, there is also contingent due diligence, where the buyer conducts site visits and inspections to ensure everything meets their requirements. This happens before closing and can result in canceling the purchase if the findings don’t match the seller’s presentations or if a revised purchase agreement can’t be negotiated.
In most states, residential real estate purchase agreements contain standard due diligence language, often with a state-defined 10, 15, or more days designated for the process. The full process must consider physical inspections, financial reviews, and legal issues.
The physical inspection should include a foundation, roof, heating, air conditioning, plumbing, pests such as termites, lead-based paint, land survey, flood zone review, and review of possible neighborhood issues.
The financial and legal review needs to confirm that the title is free and clear, property taxes are paid, property appraisal, pending litigation, homeowners association covenants/restrictions, quotes for homeowners insurance, and more. If the purchase is for a rental property, the review also needs to consider the current rental agreements, the rental roll, the receivables report, existing service contracts, and more.