How long a standard due diligence period lasts depends on what type of property you buy. For commercial transactions, it can be 30 – 60 days. This is because these deals are complicated and depend on complex financial disclosures. However, this article will focus on residential real estate, and these inspection periods typically last 10 business days or 14 calendar days in most parts of the country.
- The contract due diligence period allows the buyer to inspect the property before the contract becomes binding
- The inspection period starts when the seller accepts the buyers offer
- Due diligence ends on the date stated in the contract agreed upon by both parties
- When the contract due diligence period ends/expires then the contract becomes binding to both parties
Due diligence is simply the effort you take to make sure you close on a good deal, and you should start even before you begin looking for a house. When we talk about a standard due diligence period in residential real estate it means the period you must conduct inspections. It begins when the seller accepts the contract and ends on a specified date, usually about two weeks after acceptance.
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When is the Due Diligence Start Date?
Many people get confused about when is the due diligence start date. It begins when the seller accepts the buyer’s offer. When a buyer submits a contract, the seller reviews it, negotiates price or other terms, and then accepts it. In some states, like New Jersey, there is an attorney review period, and the 10-day inspection period does not begin during these negotiations. Only when they agree, and the sign does the due diligence period begin.
The contract itself contains the clauses that make up the period for the due diligence period. Typical clauses include:
- Mortgage contingency
- Home inspection
These clauses define the period for the buyer to get them accomplished, and they clearly state the start date for the contract due diligence period. None of it begins, though, until the seller agrees to the deal and signs the contract.
Standard Due Diligence Period Meaning
What does due diligence mean? Smart mortgage defines the standard due diligence period as the time that the buyer may inspect the property, settle the mortgage, and prepare for the closing. It has a specific beginning and end.
- The beginning starts when the seller signs the contract.
- It ends when the parties remedy or remove all contingencies.
This is flexible. It usually runs from 10 to 30 days. It is rarely shorter, but it can run longer depending on the condition of the property.
In some areas, such as North Carolina, buyers pay a due diligence fee or deposit. This is non-refundable. A typical fee is up to 1% of the purchase price, but it varies widely based on the strength of the market. It is separate from earnest money, which is common across the country. Earnest money shows the buyer’s commitment to the contract, and it is usually refunded if the deal falls through before the inspection period ends.
Buyers often ask when does the 10-day inspection period begins, and how long does it last? They should learn when it starts, and whether their state laws count weekends. In most cases, the home inspection period is 10 business days or 14 calendar days. These are period lengths for some states:
|14 – 30 Days
In any state, the law does not have a mandatory period. The buyer and seller negotiate based on the situation. Therefore, you can negotiate any period that is reasonable for you. However, it will end on a date specified in the contract. You must finish before that time.
In New York, home inspections take place before the parties sign the contract. The two parties sign a purchase and sales (P&A) agreement. Then they hire an attorney to draft a contract. During the period between the P&A agreement and the execution of the actual contract, the buyer conducts home inspections.
In Texas, the buyer inspects the property during the option period. In other states, like New Jersey, this is called an attorney review period. The critical thing to remember is that the buyer inspects the house before the contract is binding. The seller places the home in option pending status, and the buyer pays a non-refundable fee that is separate from the earnest money deposit for this privilege. If the buyer finds something wrong and wants to terminate the contract they lose only the fee, not the entire earnest money deposit.
When Does Due Diligence End?
The standard due diligence period ends on the date agreed to by the buyer and seller in the offered contract. The two may negotiate this due diligence date, but once each party signs, then the end date is set.
While a 10-day inspection period is a benchmark in most areas, the buyer or seller may negotiate the length of time. This period is not set by law. In fact, a buyer does not even have to do a home inspection or ask for a due diligence period at all. On the other hand, there may be extenuating circumstances that necessitate a longer period.
Life does not always go smoothly, and neither do home inspections. Sometimes an extension is necessary. Some things that extend the due diligence period past the end date include a(n):
- Death in the family
- Natural disaster
- Uknown easement or encroachment
- Abandoned underground oil tank
Any of these can cause a delay. However, it is important to remember that the seller does not have to agree to the extension. They can hold the buyer to the original agreed upon date. In this case it is better to cancel the contract, deal with the issue that necessitated the delay, and then bid on another property.
An appraisal contingency is a common clause in a residential real estate contract that allows the buyer to back out or renegotiate if the house appraises for less than the agreed-upon price.
Forbes has a useful article about this important clause. Mortgage companies require an appraisal, and if it comes in low the bank will not approve the loan. If the buyer cannot get a mortgage, then they cannot buy the house. Without this clause, some home buyers will be in a bad position.
While this technically is not an extension and certainly can draw out the process. The two parties must either renegotiate the price or other terms to satisfy the bank’s requirements or cancel the contract
A mortgage loan contingency is another clause in the original contract, and it, like the appraisal contingency, is not technically an extension. However, it is the most important contingency clause in the document.
It takes a long time for the bank to go through the underwriting process. As diligent as you are with the mortgage checklist we discussed earlier, you will certainly miss some things. In addition, the bank will want to verify and substantiate many pieces of information you give them.
In fact, the underwriting process takes the longest time in the whole house buying process. It goes right up to the closing. If the bank will not approve the loan, then the buyer will not have enough funds to buy the house. Without this clause, the buyer will be in a bad situation if the bank decides not to approve the loan.
What Happens After Expiration
Homebuyers need to be prepared for what happens when the contract due diligence period expires. One of two things happens. Either the two sides agree to extend it, or the contract becomes binding. Smartasset.com points out that when this period ends you lose some of your protections. If you back out after it ends, then you will lose your earnest money in most cases.
While the appraisal or loan contingency clauses protect you in those cases, you cannot simply just get cold feet and decide to walk away. Only if the seller hid something like a serious defect can you get your earnest money back after the inspection period ends. The bottom line is that after the due diligence period ends you are committed to the agreement.
Final Thoughts on How Long is a Standard Due Diligence Period
What is a standard due diligence period in real estate transactions? It is an important period that gives the buyer time to inspect the property that they want to buy. In a general sense, it begins when both parties sign the contract, and it ends when all contingencies are resolved or removed. The reality is that the buyer and seller can negotiate duration, but the length for residential contracts is 10 business days in most areas.
You should start learning how the process works in your area even before you begin your search, before you find a bank, and before you find a realtor. The more you know the easier it will be for you to find competent professionals and navigate the issues that will arise during the process.