Due diligence is an important part of any real estate transaction, whether you’re representing the buyer or the seller. When advising clients about due diligence, it’s important your team is all on the same page. Consistency is key to both protecting your valued clients, your team members, and your real estate brokerage.
Due diligence ensures that buyers know exactly what they’re in for with a property — the good, the bad and the ugly. After all, buying a property is usually the most costly transaction anyone will be a part of. So, having the right information to make an informed decision is essential.
Here’s your due diligence checklist…
A Common Understanding of Due Diligence
Key to consistency in due diligence is a common understanding of its definition and purpose across your team. Due diligence involves the examination of every aspect of a property that could affect its suitability and/or value. It’s about buyers doing their homework before deciding to purchase a property to minimize the risks. For real estate professionals like you, it’s also about risk minimization. You can minimize both your risk and that of your clients by advising clients about what they should do from a due diligence perspective.
Check the Title
Before purchasing, investigations into the title should be done to ensure there are no encumbrances on the property. This includes title deeds, land records, tax liens (in case there are legal claims against the asset for a previous owner’s failure to pay taxes), bankruptcy records, and any other judgments or claims attached to the home. It’s like a background check, but for a property instead of a person.
Property and building inspections are an important element of due diligence. It’s standard practice to advise buyers to arrange an independent building inspection.
Pest inspections are also reasonably common to check the property for termite damage. Electrical inspections are suggested for older properties in particular, if it’s obvious the home hasn’t been rewired in many years. In a 2017 report, the National Fire Protection Agency says that a significant 57% of home fires between 2010 and 2014 were due to electrical distribution, lighting and power transfer equipment.
Likewise, plumbing inspections will check for sewer issues, major leaks and other plumbing and drainage related issues at the property.
If a buyer is faced with an unwelcome surprise post-purchase, both the seller and real estate agent might find themselves facing a lawsuit. Usually, a building inspection would identify if anything is not up to building code, but there are a variety of other compliance issues which should be checked:
- Easements — are there any shared driveways or access points?
- Permitted additions — were any extensions, garages, carports or other structures created with the relevant local approvals? (CRES Building Permit History Reports can reveal the presence or absence of permits on a property.)
- Zoning — are there any restrictions on the development of the property?
There may be additional compliance issues to check that are local to the area. For example, in Los Angeles, properties cannot be sold unless plumbing fixtures comply with the City’s Water Conservation Ordinance. LA also has regulations governing seismic gas shut-off valves and apartment security lighting and locks, among other things.
Assessing the Location/Area of the Home
Where a home is located can greatly affect the value and desirability of the property. As such, due diligence includes looking at the environment and location of a home.
This involves a check of:
- Earthquake, flood activity or chance of wildfires
- Local amenities, including schools, hospitals, parks, cafes/eateries, leisure activities
- Any major development in the area, particularly industrial projects which could affect the quality of life, e.g., fracking activity or mining.
- Neighborhood crime
- Public transport connections
While buyers should be advised to do their own due diligence, keep in mind that if the seller or real estate agent know about issues that may materially affect the property value or a purchaser’s decision to buy, these issues must be disclosed.
In some cases, buyers will want to conduct an environmental assessment. This assessment identifies any soil or groundwater contamination from heavy metals, pesticides, petroleum, and other hazardous materials. A comprehensive environmental assessment also examines internal hazards, such as the presence of asbestos, lead paint or mold in the building.
Some buyers may wish to obtain an independent appraisal of the property. If they are obtaining finance to fund the property purchase, an appraisal will generally be required to ensure the purchase price isn’t higher than the property’s actual value.
Minimize the Risks for Your Real Estate Team
Advising clients to undertake due diligence both in selling and buying property can help to minimize the risks for your real estate team. Be sure to instruct your team to document any correspondence to clients and ensure there is a paper trail. This will be useful if they are ever questioned about their advice to clients about due diligence matters.
You can also protect yourself and your team against lawsuits with a CRES E&O policy with Team Coverage. Our customized policies are specific to real estate risks, and the extensive coverage goes far beyond most other generic E&O policies. CRES E&O + ClaimPrevent® even offers expert advice any day of the week at no extra charge from qualified attorneys.
Contact CRES at 800-880-2747 for a confidential discussion today and we can tailor an insurance solution to suit your specific needs.