January 1, 2011 North Carolina Real Estate Law switched to a new Offer to Purchase and Contract which contains a Due Diligence clause that gives Buyers a set period of time to, investigate the condition of the property and make sure repairs are made if necessary, get an appraisal that the lender will accept and, secure financing.
Without question the biggest and most important FIRST STEP is to find a Real Estate Agent (A Buyers Agent) to represent your interest in what is probably the largest financial transaction thus far in your life. Once you have found your trusted Buyers Agent the other three steps will be much easier. Buyer Agents work solely to protect your financial interest and it doesn’t cost you anything. Commissions are usually paid by the seller at the closing table.
Before the business of finding the right house begins you must investigate which lenders are offering the best interest rates and get pre-approved before we start looking for your new home. It’s important to know exactly how much house you can afford, this will make the search narrowly defined and keep your focus on affordable properties.
Once you are pre-approved, and you are ready to make the offer, you and your Buyers Agent will determine the length of the Due Diligence period. This can vary somewhat depending on the condition of the property and how many, if any, repairs must be made to make the property compliant with the lenders guidelines and to assure the property will appraise to the satisfaction of the lender. Next is how much money are you willing to put up to secure the house for the Due Diligence period. Some buyers try to get by with a hundred dollars or even less. Sellers and Sellers Agents are starting to demand more Due Diligence up front to assure the sellers that the buyer is serious about completing the transaction. Under NC law a buyer can forfeit the Due Diligence deposit and walk away for NO REASON and the seller has no recourse except to keep the due diligence deposit. Technically the house is not off the market during the Due Diligence period but other prospective buyers may not want to make an offer knowing the property is under contract and could be tied up for weeks if not months during the Due Diligence period. Because the house is basically unavailable to other buyers sellers are requiring Due Diligence deposits equal to one month’s mortgage payment and sometimes even more.
What are some of the stumbling blocks along the way with Due Diligence? One of the big ones is once the buyer orders a Property Inspection, hopefully by a licensed and bonded inspector and the list of repairs is more extensive than anticipated the owner may decline to make the repairs or the owner may not be financially capable of making the repairs. Are you the buyer willing to accept the house as is and make the repairs yourself. What adjustments to the offer must be made and how will it be presented? This is where your Buyers Agent uses their expertise. What effect will this have on the appraisal and what will the lender require, will you need a second mortgage to make the repairs, if the seller agrees to make the repairs must he use licensed contractors, approved by you, or make the repairs himself (BIG ONE), maybe the seller doesn’t know which end of a hammer to pick up. Has the owner made an addition to the house without getting the required permits, is the home on city water and sewer or on a septic system. Septic systems have to be inspected when a house is sold, if you are using FHA or VA financing, to make sure the system in in compliance with applicable codes.
These questions and many more are sure to be part of the negotiations that are always part of the normal real estate transaction and your trained Buyer Agent will be there to be sure your interest are faithfully represented. Avoid the Due Diligence mine field and hire a Buyer’s Agent; it will be the best money you never spent.