A normal due diligence period maybe 10 or 30 days depending on how you define it. As with everything else regarding property sales, Laws and customs chance from state to state and community to community. Do your homework and make sure you understand how your state and local area defines this.
- 10-day periods usually only include inspections, but you probably still need 30 days to close with a mortgage.
- 30-day periods usually include the mortgage process as well. In this case due diligence and under contract are synonymous.
Property transactions are complicated, and any issues that arise make them even more difficult. What defines this length of time differs from state to state and region to region, so know your local market.
What Defines the Due Diligence Period?
The due diligence period is the time that the buyer may inspect the property, settle the mortgage, and prepare for the closing. It has a specific beginning and end.
- It begins 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.1
We generally think of a 30-day period as the standard. Why 30 days? Because it takes time to run inspections, but more importantly it takes time to secure a mortgage. The buyer needs to get these inspections, and maybe more:
- Home inspection
- Title search
- Home appraisal
The mortgage underwriter needs some of this information to prepare the loan. Therefore, the buyer must do inspections first. The lender takes the most amount of this time to secure the terms of the loan.
A 10-day period is also standard. In some areas, they distinguish between the two. A due diligence period is the first 10 days, and the spends the other 20 days securing the mortgage. Having said that, some sales can close in as little as 10 days. In order to close a deal in such a short period, the buyer usually removes two important contingencies of the contract.
- Home inspection
Cash deals close faster. Without a mortgage, the appraisal isn’t necessary. The buyer doesn’t have to wait for the lender to run numbers and prepare papers. Also, if the buyer accepts the house as-is they may or may not order a home inspection, but they will not negotiate any repairs.
Due Diligence Period Deadline
A due diligence deadline is exactly what it implies, a deadline to finish the home and other inspections. Why do sellers include it in a contract?
- Buyers should have a sense of urgency to finish the transaction
- With a mortgage, a contract usually takes a month to close anyway, delaying any steps makes the process even longer
- If issues arise, the parties usually extend the deadline
No one wants to drag out the process, so sellers include deadlines to get inspections finished. It’s not to be difficult, but it should underscore the importance of doing things in a timely manner.
Whether this length of time includes weekends should have a straightforward answer. Often, it does not. Most of the time residential sales follow similar standards:
- Commencing day is the day 0
- 5 days or less count only business days, but more than 5 days count all days
- All periods end on a business day, and a day ends at 9:00 PM local time
These are general guidelines. They hold up well in most areas, but you should ask your agent how they mark the time in your area. There is an exception for the last point that all end on a business day. Often, closings happen on weekends.2
The due diligence period can be extended. The purpose of inspections is to uncover hidden problems. If there are no problems or the issues are minor, then you will easily finish before the deadline. However, if your inspections find major problems, then it is in everyone’s best interest to extend the timeframe and fix the problem(s). Some examples are:
- Leaking underground tanks
- Major toxic mold remediation
- Damaged foundation
- Water damage
- Termites or other wood-destroying insect infestation
If inspections uncover something major, a seller needs to address it. Even if the current deal dies, they must disclose it to any new potential buyers. If this happens, it is more likely the buyer will want out of the contract than the seller. The seller will have a much harder time to find a new buyer, so they should be happy to extend the deadline until after the repairs are made.
When Due Diligence Period Expires
When due diligence expires the buyer loses their ability to negotiate or terminate the contract based on the contingencies that expired. The best, and most common, example is that the buyer waits too long to get a home inspection.
- The buyer must accept the house as-is or be in breach of contract
- If the problem is very large the buyer may walk away but lose their earnest money deposit
As you can see, buyers must be punctual and diligent about contingencies. Know what they are and what their deadlines are.
The due diligence period gives the buyer time to inspect the property that they are buying. 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 definition and duration can get complicated.
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.