The due diligence period can be described as a period in which an investigation or a review is done in relation to the property concerned in the transaction. This can be done in various ways such as inquiry, physical inspection, etc. During this period of time, a buyer or seller can back out of the deal due to any reason and will be provided with certain protections. However, backing out after the due diligence period by both the seller and the buyer can be a little costly as the seller may be asked to furnish the expense incurred by the buyer and the buyer may be deprived of the sum he deposited as the earnest money. 

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What is a typical due diligence period? 

The due diligence period is a negotiated period wherein investigation on the property can be made by the parties. It is a decision-making period wherein the parties decide whether they are willing to carry on with the purchase and begins when the parties sign an agreement. A typical due diligence period extends from 10 to 30 days in most of the countries and it is the time given to carry out professional inspections and other inspections on the property to discover any damages on the property.

It can also be used as a time to investigate the title of the property as well as the different laws and customs related to the purchase. The period is flexible and can take longer depending on the conditions of the property. 30 days is considered as a standard period as it gives the buyer a reasonable time to acquire a mortgage or any loan as well as to conduct inspection through the documents concerning the title. It also enables the buyer to obtain a home appraisal.

However, the sale can take place in a much lesser period if the transaction is by cash as banks generally carry out the inspection and appraisal if financed through them. The period can also be extended in cases of leaking underground tanks, water damage, etc. that cannot be remedied in 30 days. The period expires when the buyers lose their ability to negotiate. 

Can the seller back out after due diligence if the appraisal is low? 

The appraisal is professional help which helps in identifying or estimating the value of the property.  The seller may back out of the sale if the buyer’s bank-ordered appraisal comes below the offer price. The seller can also ask the buyer to furnish the remaining amount and on failure to do so terminate the agreement. How can you resolve a problem arising out of a low appraisal? The seller can:

  • Ask the buyer for the appraisal detail if the seller believes that there is a miscalculation and on receiving the information, the seller can go through the factual items and check if it is correct.
  • The seller can also ask the buyer to challenge the appraisal. The seller can aid the buyer’s agent in proof of why the appraisal needs to be reconsidered.
  • The seller can also offer seller financing as an option and be open to negotiation. 

If the buyer is not interested in challenging the appraisal, then the seller can draw back from the deal. If the seller wishes to sell the property as soon as possible, then he may relist his property otherwise wait for another buyer after the real estate value increases. 

What to do if there is a mistake in my due diligence report?

If you think that the due diligence report so prepared is faulty, then as a buyer you can challenge the same. Some of the things that can be done by the buyer are:

  • Ask for the appraisal in the due diligence report if it shows to be faulty. You can ask for the copy along with the computer valuation and other data.
  • You can also change the lender and start the appraisal process all over again. 
  • Make sure that there is an appraisal contingency in the offer you are making. 

Some of the common mistakes that can be caused in the due diligence report are:

  • Improper site evaluation can be a reason for the improper due diligence report.
  • Mis-interpreting by the lender which leads to a low appraisal which further leads to a lesser amount as loan.

Thus it is with the buyer to decide if he wants to continue with the deal or not. If the seller is of the opinion that there is a fault in the due diligence report then they may ask the buyer to challenge the same by providing proof to the contrary. 

How do you do due diligence on residential property?

The due diligence test can be done in two ways, i.e. full search and limited search. The full research is done in cases of sale or long term lease practice. The limited search is generally done in cases of short term lease agreements. The various processes involved in the evaluation of a residential property are:

  • The legal capacity of the present owner: It is important to check if the owner of the property is a minor or a person of unsound mind. A deal with a minor or a person with mental inabilities can only be ratified only with his or her guardian’s approval. 
  • The nature of the current owner’s right is to be analyzed and evaluated. It is important that the owner possess the right to transfer. The person can have absolute ownership, right of a perpetual lease, tenancy right, etc. to legally transfer property. 
  • The legality of construction: the lawyer engaged in the due diligence process should ensure that construction processes can be carried out in accordance with the law to avoid further complications. He should also ensure that the construction works are carried in accordance with the approved plan as any additions outside the purview of the sanctioned plan, can be demolished. It is also recommended that the buyer obtains an occupancy certificate and possession certificate before taking over the property as in the absence of the same, the buyer can be asked to evict the property. 
  • Encumbrances over the property: The officer or lawyer carrying out should ensure that there are no pending encumbrances, charges, or mortgage lending on the property. He should also ensure that there is no tax amount pending on the property and this can be carried out by verifying the tax receipts. 
  • Due Diligence is also done on residential property by checking for any damages.

Summing up it can be stated that the due diligence period can be between 10-30 days. 30 days is considered as standard time as it provides a person with a reasonable time to arrange financial assistance, inspect the property, and evaluate the damage that can be caused. The seller can drawback out of the deal if the appraisal is low and the buyer is unable to finance the rest. The seller can ask the buyer to challenge the due diligence report in cases of fault.