Due Diligence - Part Two

Posted by Steve on Jul 18, 2013 2:33:46 PM

In Buyers, David Nishan, Due Diligence, Due Diligence Fee, Due Diligence Period, McLean Mortgage, Sellers, settlement

Due diligence can make the purchase of a beautiful home like this easier and safer for both parties.Due Diligence is not designed to be an absolute fail-safe for a buyer, nor a money maker for a seller. The concept is one of shared risk and defined reward. The buyer is risking money and time for the ultimate right to control a property. The seller is risking the opportunity cost of limited market exposure and squandered selling time.

A real estate transaction is perhaps the single largest financial decision most people make. Both parties have a lot at stake. Not just money, but also time, emotion and energy. It does not need to be, but sometimes becomes a grueling affair. It’s a shame how many transactions are proposed by parties ill-equipped to complete them or by agents not competent to manage them.

In a balanced market, a buyer should not make an offer on a home without having first completed, among other things, thorough vetting with a lender. The only conditions to your loan approval should be property centric and/or last minute verifications. Don’t assume you will arrange financing after you have a contract. Don’t expect to have 30+ days of due diligence to get your loan in order. A good lender like David Nishan at McLean Mortgage can complete their work much sooner than that. It is in everyone’s interest that a buyer be prepared.

In fact there seems to be a misconception, that your loan must reach final approval within the Due Diligence Period. That simply isn't true. Oh, in a down market you may as well ask for enough time for final approval, but it’s not necessarily the intent of Due Diligence. Again, it’s a shared risk environment. What you actually need is to be able to make an informed decision about your ability to complete the transaction on or before your Due Diligence date. If you have provided the information they required your lender can surely provide you with ample comfort that your loan will be approved before they can actually provide final approval.

As a buyer you should expect to invest a material amount of money to hold the rights to a property for a specific timeframe. For your own protection, enter into the transaction only after you have satisfied yourself that the neighborhood, the schools, the home and your loan are to your liking. The Due Diligence Period should be for finalizing your financing and making sure the home does not have any hidden fatal flaws. You and your agent should discover and assess most issues or deficiencies before you make an offer.

As a seller you should not expect a large Due Diligence Fee if your agent has failed to create demand for your home. Likewise if your home clearly suffers from a lack of maintenance.  A buyer will proceed cautiously if it appears your home may have hidden or numerous defects. Get your home in order before placing it on the market. Consider having a pre-inspection completed. Make repairs as necessary. Give a buyer every reason to feel good about your home and the transaction they are considering.

The Due Diligence Period should not end on the day of settlement, nor should it end the day or two just prior to settlement. In my opinion there should be at least 10 days between the expiration of Due Diligence and the day of settlement. While preparations for the move should have been made, both parties need enough time to actually relocate. Doing so during the Due Diligence Period is foolish. Under normal circumstances a buyer should not ask for an extension of Due Diligence without expecting a corresponding adjustment to the settlement date.

Due Diligence is shared risk. It is market driven. It is negotiated between the parties. In short, it’s efficient and transparent. With proper preparation and good-faith negotiation Due Diligence is only another step toward a successful closing. The agents of The Vincent Group at GreatNest are very capable of guiding you through a pleasant transaction. Whether you are buying or selling you will discover there are many benefits to working with our accomplished agents.