Monday, January 27, 2014

Iowa Residential Real Estate: What is due diligence?


Due diligence is work and requires planning, thinking and execution, which is why it hardly ever gets done right. If you are lazy and ignore the due diligence inspections you can make a very expensive mistake.

Most calls I receive from disgruntled buyers can be explained by their lack of performing due diligence. During the home buying process they notice defects, but then quickly try to explain it away to avoid additional work. This is buying on a whim and with your home costing you thirty years of mortgage payments I’d think it deserves more attention to detail.

So what is due diligence? Formally it is a set period of time with a start and end date during which you duty as the potential buyer is to investigate by examining the physical aspects of the property you are attempting to buy.

Due diligence can last several weeks and how long it lasts is never set in stone. As the buyer you can set a long or a short due diligence period; the longer the better from the buyer’s standpoint. If the seller wants a real short due diligence period it usually means there is a hidden defect or defects the seller does not want you to discover.

As the buyers, you should set the due diligence for at least two weeks and no less. Then during those two weeks you need to spend some money on experts, although there are ways around having to pay for the serviceman to examine the systems.

During the due diligence period consider all the systems of the house and have one or more serviceman who are qualified, ready, willing and able to evaluate the quality of the systems in place. As an example the furnace and air conditioning system needs to be evaluated. You will need a heating and air conditioning company to enter the home (make arrangements) for the purpose of opening up the furnace door and examining the internal parts to make sure you don’t have broken pieces (heat exchanger is one example).

Who pays when the due diligence inspections were done or weren’t done right?

Normally the buyer does unless they can show the sellers hid a known defect. That is an expensive venture and normally the costs of litigation exceed the cost of repairs. When the cost of litigation exceeds the repair costs, litigation is not an option for the buyers. Litigation is not always the best course. There are many situations where getting out your checkbook is the best course of action.

Diligence Means To Act With Diligence

So act purposefully and meaningful during the due diligence period and make a list of all the systems within the house. Identify vendors who can evaluate the systems in the home and then schedule the appointments. Here is a list of what in my opinion you need to do.

DUE DILIGENCE ACTION LIST

  1. Take the due diligence period seriously.
  2. Stay organized about how to conduct the due diligence.
  3. Spend money to get the right service experts in to evaluate the home’s systems.
  4. Attend all inspections with your experts.
  5. Ask the experts questions.
  6. Actively participate in the inspections.
  7. Read their reports several times and make sure you understand.
  8. Know the limitations of those reports.
  9. Buy the home warranty covering all systems.
  10. Make the sellers pay for the home warranty if the disclosure form isn’t clear in any way.

This is Steve Lombardi, attorney and real estate broker coming to you from Iowa.

HOW TO CONTACT US
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Telephone: 515-222-1110
Fax: 515-222-0718
Write to Steve or Katrina



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