Extending the due diligence period for a real estate contract may be necessary at times. This time is important because both sides need to know if there are unforeseen issues with the property or the contract.
- When the due diligence period expires some clauses lapse
- Buyers and sellers can and often do extend due diligence periods
Before you agree to any extension make sure it is for a good reason. You need to address major problems, and sometimes they take longer than the original due diligence period. On the other hand, don’t allow a lazy buyer or seller to procrastinate.
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What Happens When Due Diligence Expires?
When due diligence expires most of the contract’s clauses lapse. For instance, a common clause in almost all real estate contracts is for a home inspection. It is reasonable for the buyer to request a professional inspection in a timely manner. Provisions are made so that if there are any issues that the seller didn’t know about the buyer can negotiate a remedy for the problem. However, if the buyer drags their feet and doesn’t have the home inspected before the end of the due diligence period then the seller may balk at remediation. There are several reasons a seller may do this. They may:
- Decide that the buyer isn’t serious about the house
- Get a more advantageous offer
- Have a personal reason they no longer want to sell to that buyer
Buyers should know the clauses that are subject to the due diligence period and take care of them as soon as possible. After the period is over, they risk losing their earnest money if they decide that a problem is too big for them to stay in the deal.
What Does it Mean When Due Diligence Expires?
When due diligence expires certain clauses lapse. Common due diligence clauses include:
- Inspection contingency
- Title Search
- Appraisal
- Financing
The clause most associated with the due diligence period is the inspection. The buyer needs to get this done as soon as possible in case there is a problem. Then, they can negotiate. Often this is when the parties need to extend the period.
The process of underwriting a mortgage usually takes longer than what we think of like the 10-day due diligence period. It has its own time frame within its clause. In fact, this process takes most of the time for the house to close.
Is the Financing Clause Part of Due Diligence?
The financing clause is part of due diligence, but we usually think of it as separate because the process takes longer than ten days. It usually includes:1
- A set time period to close the loan
- The type of loan
- Down payment amount
- Loan terms
Securing financing is the longest part of the process. In fact, cash deals usually take half as much time, because they don’t have this clause. The reason it takes so long is that the bank requires so much documentation about the buyer and the property before they will make the loan.
Can Due Diligence be Extended?
Due diligence can, and often is, extended. The period gives the parties time to conduct inspections, appraisals, and searches in a timely manner. It does give enough time to deal with minor issues. However, it doesn’t necessarily provide enough time to fix any major problems.
We assume that there won’t be any problems, or that issues will be minor. If there is a major problem the buyer and seller can agree to amend the contract to allow more time.
Reasons for Extending Due Diligence Period
There are many reasons for extending the due diligence period. Real estate transactions are complicated, and almost any kind of issue that you can think of may arise. Some common major issues that can force the buyer and seller to agree to an extension include:
- A structural problem with the house, such as a compromised foundation
- Mold and/or wood-destroying insects
- Asbestos
- Seller didn’t get permits for improvements
- Cloud on the title
- Encumbrance to the property
These are just a few examples of common problems that may lead to an extension of the due diligence period. The list is almost endless. Some issues can get political and even very strange. For example, I worked on a transaction that the federal and state governments held up for over a year because the house had an underground oil tank that leaked into the water table.
Amendment to Extend Due Diligence Period
Amendments to extend a due diligence period can be as short as one sentence. You may also want to include restrictions depending on why an extension is necessary. You can make it for a specific issue, or it can be a general extension to cover any problem. The parties must meet only two conditions:2
- A specific time for the new deadline
- Both the buyer and seller must agree to the change
Beyond that, you can negotiate whatever terms are reasonable for both sides.
Final Thoughts on Extending Due Diligence Period
Real estate transactions are complicated, and sometimes issues come up that take more time to resolve. That is why extensions to due diligence periods often happen, so they aren’t something you should be afraid of. You should be mindful, though, of the reason for the extension. Is it a good reason because of a serious unforeseen problem; or is it because the buyer procrastinated?
If there is a serious problem it is probably better to work together to resolve it, because chances are that you will have the same issues with the next contract. If the other party is petty or doesn’t get things done in a timely manner, then you may not want to agree to an extension.
Work with your real estate agent and attorney to help navigate the process. Good professionals have seen it all, and they can help you make good decisions about how to handle the other side.
