If you’re a first-time homebuyer, the first thing you’ll want to do is connect with a great real estate agent. Once you do, you may hear them say something like this: “We might need to consider reducing your due diligence period or removing it altogether.” So what is this “due diligence period” they speak of? Why is due diligence one of the most important terms of a home offer? Why do sellers love it when you scrap due diligence, and when is it safe to do so?
What is due diligence on a home offer?
Due diligence is most easily defined within the context of closing. Closing is the big window of time — usually 30ish days — between the seller accepting your offer and you actually purchasing the home. Due diligence is a briefer window of time (usually 10 to 15 days) at the beginning of closing during which you — the buyer — can still pull out of the home offer with no penalty. As the name implies, the purpose of the due diligence period is to give the buyer some additional time to inspect the property, check out the neighborhood, etc. In essence, due diligence is the 14-day return window for the house (even though you technically haven’t bought it yet).
Who determines what the due diligence period is?
The buyer (in this case, yourself), determines what your own due diligence period will be. It becomes a line item in your offer and will be one of the first things the seller looks at. If they see that you have zero due diligence period, they’ll react like this:
(More on why zero due diligence is like home seller catnip in a minute.)
What kinds of things should you be doing during your due diligence period?
Your REALTOR® can guide you through an efficient and effective due diligence period, but for reference, here’s a short checklist of things you’ll want to get done:
- The inspection – During a home inspection (~$300-$400, buyer pays), an inspector analyzes the house onsite and produces a report like this one to show what might need repairs (HVAC, plumbing, etc.) and other issues (cracked foundation, pests, etc.).
- The appraisal – During the appraisal, an independent third-party appraiser comes in and comes up with a fair market value (FMV) on the home. The FMV lets your mortgage lender know how much they can safely loan you since they’re using the house as collateral on the loan.
- Pricing out repairs – You’ll want to get the home inspection done ASAP so you can start factoring the cost of repairs into your final purchase decision.
- Reading the Seller’s Disclosure – Sellers are required by law to provide you with a document listing known issues with the home (leaks, cracks, liens on the house, etc.). You can find a blank Seller’s Disclosure for your state here, courtesy of eForms. Seller’s Disclosures are super helpful because if a seller fails to disclose a big issue, you can use that as leverage to negotiate a lower price, back out, or even sue them if you find the issue later.
- Financial due diligence – Due diligence is also an excellent time to estimate property taxes, get home insurance quotes, and see how much you can charge in rent (if your HOA allows renters at all).
- Reading up on HOA stuff – If the home is part of a homeowners association, the listing agent will email you the HOA disclosure during DD. Here, you can read up on dues, bylaws, rules for renting, etc.
- Spending time in the neighborhood – Finally, one of the more relaxing and enjoyable aspects of due diligence is to simply chill in the area. Go for walks, try a local restaurant, and spend a few hours deciding, “Can I picture myself happily living here?”
My wife and I actually pulled out of a contract because as much as we loved the property, the surrounding neighborhood was a bust: no sidewalks, dangerous drivers, and not an Aldi in sight for miles. Thankfully we’d included due diligence in our offers, so we could bail without penalty. But what if we hadn’t?
What happens if you back out after due diligence expires?
You’re not necessarily locked into buying the house if you back out after due diligence expires. You do, however, lose your earnest money. Earnest money is a big pile of cash — usually 1% to 3% of the offer price — that you put into an escrow account shortly after a seller accepts your offer.
- If you end up buying the house, earnest gets applied to your down payment.
- If you back out during due diligence, you get your earnest money back.
- If you back out after due diligence, the seller keeps your earnest money.
Earnest money exists to show your commitment to a seller. It also helps you by preventing other buyers from making offers willy-nilly just to take homes off the market. Finally, earnest money is a big deal for sellers because it partially compensates them for the cost and headache of having to relist their home for sale. “When you relist a home, its days on market (DOM) increase and buyers can see that it’s been relisted, which raises questions and can ultimately affect the next offer,” writes Joseph Elkourie, REALTOR® and founder of The Axis Group. By this point, sellers’ disdain for due diligence might start to make sense — so let’s dive in further.
Why do sellers love offers with zero due diligence?
When you submit an offer with zero due diligence contingency, you’re telling the seller, “either we buy the house or you keep our earnest cash.” Sellers love this because it shows commitment — and a much lower likelihood that you’ll bail out, forcing them to relist the home.
In late 2021, my wife and I even had some listing agents tell us straight up: “We aren’t considering offers that include a due diligence contingency.” That included the house we’re in now.
And to be clear, these sellers weren’t being greedy; they were actually doing us a favor by telling us what it took to win. So when is it safe to nix due diligence?
When is it safe to remove due diligence from your home offer?
When you give up your due diligence, you’re forfeiting your right to walk away with your earnest cash. From this point forward, you either buy the house or leave 1% on the table. For that reason, zeroing out due diligence is akin to gambling; you’re betting your earnest cash ($2,500 – $10,000) that you’ll find nothing seriously wrong with the house. Yep, scary. So, in a seller’s market where zero due diligence is helpful — sometimes necessary — how can you mitigate the risk that you’ll get stuck with a “turd wagon” (as my REALTOR® so lovingly calls them)?
- Inspect as much as you can during tours – If you’re serious about a home, make as many seller-approved visits as you can (tours, open houses, etc.) and ask your REALTOR® or contractor friend to help you scan for red flags: cracks, leaks, mold, etc.
- Buy newer homes from reputable builders – If it’s within your budget for a home, consider that a home built within the last five years will require fewer capital repairs than an older home. Just be sure to consult your REALTOR® on which builders to trust; some are known to literally cut corners and skimp on materials.
- Keep your earnest money low – Don’t gamble too much of your home budget away in earnest cash — keeping it to the standard 1% should be enough to make sellers happy.
Due diligence is a window of time at the beginning of closing during which the buyer of a home can back out and keep their earnest money. That makes it quite the stressful time for sellers, which is why they love to see you reduce — or better yet remove — due diligence from your offer. Looking to craft the most compelling offer possible? One that will make sellers salivate? Try a triple zero offer. Featured image: Sasun Bughdaryan/Shutterstock.com