Whether you’re about to close on your first property or a seasoned real estate mogul, the importance of performing due diligence before sealing a deal cannot be overstated.
Due diligence is a critical phase in any real estate transaction that helps buyers (and sellers!) evaluate a deal, uncover hidden red flags, and gather all the facts before purchasing a property. From high-level corporate transactions to basic residential ‘for sale by owner’ deals, all deals should be properly vetted from both sides through the due diligence process.
Still, real estate due diligence can be complicated and time-consuming. How can all parties to a deal ensure that all relevant information comes to the surface before signing papers? How can all sides communicate effectively, stay organized, and keep the process moving?
Let’s explore how due diligence software helps take the guesswork out of real estate transactions, simplifying property transactions and helping mitigate risks.
First of all, what is due diligence in real estate?
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ToggleDefining Due Diligence in Real Estate & Why it Matters
Due diligence in real estate describes the process of researching all aspects of a transaction before moving forward with a property deal.
“In real estate, due diligence usually refers to the buyer’s research before making an offer or research completed during the contingency period before the final closing,” explains Colibri Real Estate School. “During this contingency period, the buyer, with the help of their agent, collects all the information about the property to help make a final decision about whether the buyer will proceed with the transaction.”
Failure to perform due diligence opens a buyer up to the legal and financial risks coupled with making an unwise purchase. Of course, removing all risk from a real estate transaction is impossible. Still, the due diligence process works as a safeguard to protect all parties from costly oversights.
What should buyers look for during the real estate due diligence process?
Due Diligence Checklist for Real Estate Transactions
The due diligence process is a conglomerate of several moving parts, including research, surveys, inspections, and calculations.
Commercial real estate, and especially corporate-level transactions, typically involve a more lengthy and detailed due diligence phase, beginning even before making an offer. Residential real estate due diligence is more straightforward but still demands time and attention to detail.
Here are just a handful of the many actionable facets of real estate due diligence:
- Research the market – Find out if the location of the prospective property appears to be a financially worthwhile area for investing. Gather data on the local community and surroundings, scanning for value-adding or depleting features.
- Confirm seller authorization – Ensure seller transparency and that they are legally authorized to sell the property.
- Research the property – You may reference tools like a county assessor’s public portal to do a real property search, identifying zoning laws and other relevant records.
- Review relevant documents – Get a title and deed report on the property, checking for any easements, agreements, or other restrictions affecting the property. Find out if there are any leases, ongoing maintenance contracts, litigation, entitlements, or other legally binding transactions concerning the property. Ensure all permits and authorizations have been obtained for any completed or ongoing construction. For residential properties, check if the home belongs to an HOA to identify any relevant terms or fees.
- Survey the property – Understand the property’s boundaries, identify any environmental hazards, and check for utilities and accessibility.
- Perform professional inspections – Thorough physical inspections are critical to uncovering the actual condition of a property and ensuring every aspect is up to code and devoid of costly issues such as pests, mold, asbestos, etc.
- Get a third-party appraisal – Get help from unbiased sources to calculate the property’s real market value.
- Calculate property tax and insurance – Crunch the numbers to be prepared for any tax or insurance obligations. Remember that properties in higher-risk areas, like flood, hurricane, and wildfire zones, are typically more costly to insure.
- Obtain financing – A prospective buyer must work with their lender to secure financing that meets the transaction’s terms, including a down payment and other deal-specific stipulations, like closing costs.
Finding an experienced, market-savvy real estate agent is one key to helping navigate the complex due diligence process. Still, even with the best agents, frustrating problems can arise during due diligence.
Challenges to Real Estate Due Diligence
Sealing the deal on a property can feel pretty painstaking, especially when it seems to be progressing at a snail’s pace.
Consider a few challenges to the real estate due diligence process:
- Communication breakdowns – Keeping buyers, sellers, real estate agents, lenders, brokers, inspectors, contractors, local jurisdictions, and all other relevant parties in the loop can be a logistical nightmare.
- Identifying deal-breakers – Uncovering red flags, such as environmental hazards and other liabilities, can be challenging, especially if buying a site-unseen property.
- Facing demoralizing delays – It can feel tempting to skip important due diligence steps when waiting on inspections and other verifications.
- Knowing when to walk away – Deciding when to cut losses and back out of a deal is never easy, especially when all relevant data has not been organized in a central, easy-to-review location.
“Many due diligence considerations are contingencies to the buyer’s obligation to close on the purchase, and failure of a contingency gives the buyer a right to walk away from the deal and get their money back,” says Risk Management Magazine. “The goal is to uncover and proactively address landmines that may exist to minimize the likelihood and impact of post-closing problems.”
Thankfully, buyers and sellers can use real estate due diligence software to de-stress the process and make more informed decisions.
How to Leverage Software to Simplify Real Estate Due Diligence
Real estate due diligence software can accelerate the due diligence process, saving precious time and helping buyers identify the most profitable deals. How?
Here are five powerful must-have features of real estate due diligence software:
- Secure document storage – Rest easy knowing all sensitive documents, including financial information, are secured by cutting-edge encryption. Compile all relevant documents in an accessible portal with customizable file structures to promote organization and efficiency.
- User-friendly platform – Give all parties to the deal a simple, dedicated portal for communicating, storing, and sharing documents.
- Intuitive collaboration tools – Communicate effectively and efficiently within a centralized virtual data room with configured alerts and notifications to keep the process moving as smoothly as possible.
- Customizable document permissions – Grant or revoke document permissions to any relevant party, protecting sensitive information if a deal goes sour.
- Detailed activity tracker – Keep a transparent log of all document views, edits, and activities.
Maintaining all documents and communication on a secured virtual platform allows all parties to a deal to stay informed and keep the process moving.
Well-chosen real estate due diligence software can help buyers organize and analyze relevant data and decide when to seal a deal or walk away.
Recommended Real Estate Due Diligence Software
CapLinked offers buyers, sellers, brokers, real estate agents, and all other parties to a deal the opportunity to simplify the real estate due diligence process.
Our robust software helps everyone, from small businesses to multinational corporations, to navigate the complexities of due diligence and realize more profitable outcomes. The CapLinked platform gives all parties a secure, intuitive platform for correspondence and document storage, helping the right deals close faster.
Secured with military-grade encryption, flush with collaboration tools, and complete with customizable digital rights management – our due diligence software can help elevate your approach to your next property transaction.
Find the right plan for your needs, or sign up for our 14-day free trial to see how our real estate due diligence software can transform your next deal.