Under the new 2011 regulations and rules regarding home offers to purchase in North Carolina, buyers are now provided additional protection and time to adequately investigate a potential property in a time called the due diligence period. This is a negotiated period of time in an offer to contract, and the length of time is variable on each contract. The time period can be supported by a due diligence fee (a non-refundable deposit to compensate the seller for their time if the buyer walks away from the contract).
There are important rules regarding earnest money deposit refund rights to the buyer and seller during and after the due diligence period. The separate earnest money deposit offered to by the buyer can be re-claimed by the buyer if they walk away during the due diligence period, but the seller will retain the deposit if the buyer changes their mind after the due diligence period closes. Therefore, it is essential for a potential home buyer and the agent representing their interests to be prepared and efficient in the process of investigation before the due diligence period ends.
If the buyer is unsatisfied before 5 p.m. on the last day of the due diligence period, the buyer may walk away from the deal if written communication is received by the seller's agent exercising the buyer's right to do so. The only loss by the buyer is the due diligence fee negotiated in the contract.
Important Steps a Home Buyer should Complete During the Due Diligence Period
The buyer should complete the following investigative steps prior to the final day of the due diligence period, as the Standard Form 2-T Offer to Purchase and Contract states the following regarding the buyer's right to terminate in paragraph 4(g): and to "conduct all desired tests, surveys, appraisals, investigations, examinations and inspections of the property as the Buyer deems appropriate" as well as "advise the buyer to consult with the Buyer's lender prior to signing this offer to assure that the due diligence period allows sufficient time for the appraisal to be completed and for the Buyer's lender to provide Buyer sufficient information to decide whether to proceed with or terminate the transaction".
The buyer reserves the right to terminate a contract within the due diligence period for any reason or no reason. The buyer must also seriously entertain the benefit of meeting with a mortgage loan officer prior to even searching for property in order to "prequalify" the buyer for a loan and have a realistic idea of how much home they can afford. This will greatly reduce the time needed for loan approval during the due diligence period, often a slower part of the investigative process.
General Suggestions (non-inclusive) for a Buyer to Complete in Due Diligence Period:
- Property survey with licensed surveyor approved by the lender as a condition for loan approval
- Home inspection with licensed home inspector
- Formal appraisal of property (certified appraiser usually chosen by lender, paid by buyer)
- Review zoning regulations to match buyer's plans for future use of the property
- Review restrictive covenants, owner's association bylaws, rules and regulations
- Check on availability and cost of home insurance
- Potential flood hazards and requirement of flood insurance by lender
- Wood-destroying insect inspection (essential to negotiate repair costs by seller prior to due diligence period ending to allow follow-up inspection and approval)
- Physical inspection of property and home by buyer (initial at contract closing, and followup inspection after receiving survey and inspection reports for professional sources)
- Check for existing tenants to verify if any oral leases in place less than three years not recorded
- Check property for easements and encroachments by neighbor's properties if survey not performed (not recommended) that would be missed by a title search
- Check for recent constructions or violations of zoning and restrictive covenants (might indicate mechanic's liens or violations of building codes by new additions/rooms on the property)
- Sewage disposal systems to confirm suitability for onsite septic system (if unimproved land) and capacity (number of bedrooms a system can support) by health department for existing homes
- Lead-based paint inspection if a property built before 1978 and the buyer was provided a lead-based paint disclosure form
- Radon inspection by qualified inspector
- Asbestos inspection if renovating an older property or other reason to suspect a problem
- Title search and title insurance to assure free and clear title to be delivered by the seller
Buyer's Rights Before Due Diligence Ends if Problems Arise Requiring Resolution During Due Diligence
If a buyer discovers any negative factors regarding a property during the due diligence period, the buyer reserves a few options. If the factors are serious and are so discouraging that even corrections would not change a buyer's mind (such as zoning not allowing a desired use for the property or severe structural concerns for example), the buyer can walk away with the earnest money deposit.
If a buyer finds minor concerns that the buyer would like the seller to correct, then the buyer can negotiate to have these changes performed before the end of the due diligence period, and even negotiate the possibility of extending the due diligence period time frame to allow a second review and approval after the changes were in place. The buyer will have more negotiating power to request the seller to cover the costs for the changes, or lower the purchase price, or walk away with the deposit if the changes are unsatisfactory after completion.
If a buyer does request and negotiate any changes, it is advised that these changes are solidified in writing and attached to the contract to purchase with both parties signing and dating the changes. These are serving as a condition to the sale. It is also important to note that the due diligence period does not obligate the seller to perform and cover the costs of any changes or repairs, and the seller reserves the right to say no. The buyer then has to either accept and absorb the costs of those changes later on, or walk away. If the seller does agree, the seller will need to provide the buyer and possibly the closing attorney proof of the agreed repairs during the closing process. The due diligence period is a valuable time period for buyers who would be wise to exercise their rights to investigate and act on concerns before closing to protect their interests.
Sources:
- 2011-2012 North Carolina Real Estate Manual, published by the North Carolina Real Estate Commission.
- Standard 2-T Offer To Contract and Purchase, NCAR, 2011
- Classroom Discussions, Post-licensing course for real estate agents in Contracts and Closings, CPCC, Oscar Agurs Instructor.
Join the Conversation