What Is Due Diligence in Real Estate?

When buying a house, due diligence is the process of researching a property before finalizing a real estate transaction to make sure the property meets your expectations. Due diligence is typically conducted after the purchase agreement is signed and an earnest money deposit is made.

In this article, we’ll discuss how long the due diligence period lasts and what to look for when conducting due diligence on a property. We’ll also cover what happens when the due diligence period expires, or if you skip due diligence altogether.

What happens during due diligence?

During the due diligence period, your lender will order home appraisals, title searches and other evaluations that reveal important details about the property. Buyers are typically responsible for ordering and scheduling standard inspections. 

The purchase agreement states how long buyers have to conduct due diligence and which circumstances would allow them to walk away from the deal. These circumstances are known as contingencies. It’s important to include contingencies in your purchase contract, because they help guide your due diligence efforts.

How long is the due diligence period?

Due diligence usually lasts 30-90 days. However, some due diligence periods can be as short as 7-14 days if the buyer and seller agree to a quick close. The due diligence period is determined when the buyer and seller negotiate the terms and conditions of the purchase contract. 

Real estate due diligence checklist

Buyers should have a list of tasks that will need to be performed during the due diligence period to make sure all bases are covered. Here’s a checklist of activities that have to occur during the due diligence period when buying a home. These are completed by the lender or buyer.

Completed by the lender:

• Order a home appraisal 
• Conduct a title search

Completed by the buyer:

• Order a home inspection
• Determine any environmental factors like flood risk or radon
• Review HOA documents and regulations
• Understand property tax obligations
• Estimate the cost of utilities

Completed by the lender or buyer:

• Obtain a land survey

Order a home appraisal

One of the first things that will happen after a buyer signs a purchase contract and has chosen a lender, is a home appraisal will be conducted on the property. A licensed home appraiser evaluates the property’s market value based on the physical attributes, renovations, comparable sales, and other market conditions. Home appraisals also take into account a property’s location and neighboring houses. On average, a home appraisal costs $400.

The primary purpose of an appraisal is to help the buyer determine whether the home’s sale price is within fair market value. Ideally, the property will be appraised at or above the sales price. If the property is appraised below the sales price, lenders will probably only approve you for the appraised value. In this situation, the buyer has a few options:

• Walk away from the deal and request your earnest money deposit back (possible when you included an appraisal contingency in your purchase contract)
• Ask the seller to lower their sales price to match the appraised value
• Pay the difference between the sales price and the appraised value
• Request another appraisal if you suspect the appraiser made a mistake

Order a home inspection

After you’ve confirmed your property is worth its sales price through an appraisal, you should confirm there’s no major property damage through an inspection. An inspection provides you with a clear picture of the property’s condition, not just its perceived value on the market. About two thirds of buyers (66%) said in a 2024 Zillow survey that their final offer was contingent on the property passing a home inspection.

A home inspection requires a licensed professional to assess the home’s structural integrity and condition of its interior and exterior systems. Home inspectors check for major property damage by evaluating a property’s roof, foundation, plumbing, electrical, and HVAC systems. 

As long as you have an inspection contingency in your sales agreement, you can back out of the deal and receive your earnest money deposit back. If you still want to move forward with the purchase, you can also negotiate repairs or a lower purchase price with the seller. Home inspections cost between $250 and $700.

Conduct a title search

Another key area to look into is the property’s title. A title search examines public records to verify legal rights over the property. The title search should confirm that the property either belongs to the seller, or that the seller otherwise has the right to sell the property. The title search should also reveal any pending lawsuits, liens, or other claims that could compromise the sale. 

The purpose of a title search is to uncover hidden claims that the seller may not have been aware of or failed to disclose. Title searches are usually conducted by title companies or real estate attorneys and cost $75-200. About half of buyers (51%) surveyed said they did not fully expect to pay a title insurance or title search fee when they started the homebuying process.

Obtain a land survey

Land surveys confirm the physical boundaries of a property. While these are not always required, it may be a good idea to get a land survey, especially if you plan to build on your property. If there’s any discrepancies between the area being sold and the area surveyed, you’ll need to discuss this with your seller before moving forward with the deal. The average land survey costs $550.

Research environmental factors

Some properties are prone to environmental damage due to their location. A property located in a flood zone is at risk for flooding. A property located in an elevated area might be at risk for an earthquake. It’s important to know about these environmental influences to estimate the cost of home insurance. 

Most mortgages require borrowers to purchase a standard homeowners insurance policy. However, these policies rarely cover damage caused by natural disasters, such as hurricanes, tornadoes, or wildfires. If you’re purchasing a home located in an area where natural disasters are prevalent, check how much homeowners insurance you’ll need. 

You can learn about the property’s damage history by requesting a Comprehensive Loss Underwriting Exchange (CLUE) report. This allows you to see the type of damage that home has sustained, if a claim was filed, how that claim was handled, and what renovations were made as a result of that claim. Your seller can get a CLUE report online for free.

Review HOA documents and regulations

Depending on where your property is located, you might have to follow homeowners association (HOA) guidelines. An HOA governs how a neighborhood is maintained and might restrict homeowner activity. Some HOAs limit holiday decorations, home improvements, pet types, and rental decisions. 

Additionally, HOAs require homeowners to pay HOA fees every 1-3 months. HOA fees can cost $100-$1000 per month, but the Census shows average HOA fees are $243 per month. The new homeowner must pay these fees when a property is sold. HOA fees and regulations should be disclosed before a buyer submits an offer. If they’re not, conduct due diligence to understand how HOA fees and regulations might affect your home purchase. 

Understand property tax obligations

Another expense to be mindful of is property tax. It’s important for the buyer to understand how much they’ll need to pay in property taxes at the end of the year or before closing, as part of their prepaid costs. If any tax liens were revealed in the title search, the buyer and seller will have to negotiate how these liens will be addressed before the home sale can be finalized. 

Estimate the cost of utilities

It’s also important to estimate the cost of utilities in the house. Every home needs running water, heat, and electricity. The total cost of utilities depends on the size of the house, home insulation, and appliance efficiency. Homeowners should know how old the house is and what types of systems it runs on, to get an idea of how much utilities will cost every month.

What happens when the due diligence real estate period expires?

Once the due diligence period expires, you can no longer conduct due diligence on the property unless the seller grants you an extension. Sellers usually want to see evidence that at least some due diligence has been completed before granting a buyer an extension. 

What happens if I skip due diligence on a property?

Skipping due diligence on a property isn’t advised. Although it’s not required, conducting due diligence protects the buyer from future losses. Buyers are responsible for settling any unpaid taxes, liens, lawsuits, and repairs as soon as they take possession of the property. You can’t retroactively hold the seller responsible for any property issues. It’s best to conduct due diligence before taking ownership.

Final thoughts on due diligence in real estate

It’s important to conduct due diligence when buying a house. Due diligence allows buyers to check for any issues that could impact the integrity of their home purchase, such as low property value, major property damage, and ownership disputes. Your real estate agent should guide you through the due diligence period, whether it lasts 7 days or 3 months. Your purchase contract should contain contingencies that state how issues should be addressed if and when they come up. 

Every state has its own rules and regulations regarding due diligence periods in real estate, so make sure to check in with your agent or a real estate attorney before making any final decisions. Half of buyers in a 2024 Zillow survey said their agent was the most helpful resource in their home buying experience.  If you’re looking for an agent, Zillow’s partner agents can provide local expertise and guide you through every stage of the home buying process.