Due Diligence Checklist and Tips
Due diligence. Boring, right? Wrong!
Today, I want to share some tips, tricks, and a bit of a checklist for you to do due diligence on your real estate transaction here in the Bay Area. For a fact, I can tell you that it is very different here than in every other market. It is because we transact as is, and I will get into that and what that means.
What is Due Diligence?
First, what is due diligence? Simply, it’s inspections. It involves understanding the things that affect a property’s desirability or value relative to its condition, location, and all of the good stuff that goes along with owning a home. Why was I talking about a house here being different in the process from many other parts of the country? Well, to explain briefly, our market is as-is. Meaning, buyers are often writing non-contingent offers and not doing inspections during escrow. What? Yeah, I know, it’s kind of crazy, and most people would freak out about that. But before you do, let me explain to you how this works.
It has been the culture here for many years for sellers to do inspections upfront. They give those inspections to a buyer and then have the buyer bake the repairs needed into their price and take it all subject to all of the necessary work to be done. Why would somebody do that?
Well, number one, the seller wants a more certain deal. Suppose you enter into an escrow for a million dollars, but someone has an inspection contingency. They could shred you apart on every little thing and take you all the way down to some unreasonable price. And then you have to start the whole process over again. So simply, it’s a way for the seller to disclose upfront to the buyer some details about the house. It is a way of sharing what they need to know to have a more informed property appraisal. With that, they could make a better offer upfront and have a more solid deal in escrow.
Some documents to consider when doing your due diligence
So that’s all nice and good for the seller. But it also requires the buyer to do a lot of homework upfront and understand several things. So if you’re a buyer, here’s a quick list of things you need to know.
1. A General Home Inspection and a Pest Inspection
First on the list when you’re doing due diligence is to consider what was disclosed. Whether you’re a seller or a buyer, expect to do several things. At a very bare minimum, expect to do a home inspection. That includes a General Home Inspection and a Pest Inspection.
What I’m talking about is a pest or wood-destroying organism inspection. This inspection, basically, looks at all the wood members in the house. It determines if termites, dry rot, mold, water intrusion, or anything that would negatively impact the wood is present. Then, they will quote those repairs or those items. Finally, they’ll give you an estimate of what they think it would cost to repair those identified problems. There’s a caveat, though. Many of those companies end up subcontracting that work. Thus, that work ends up being quoted at a higher number than you can get it done elsewhere. However, that’s another conversation for another video, but just know you need both of those.
2. Real Estate Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ)
Other than that, you would also need the Real Estate Transfer Disclosure Statement (TDS) and the Seller Property Questionnaire (SPQ). These are two statutory requirements for any seller living in the property to fill out an answer to the best of their knowledge. These are the direct information that the seller will give you as a buyer. Or, if you’re the seller, those are what you’re required to provide to sell the property. These pieces of information would give someone a complete picture of what’s going on there. So you would need to make sure those are filled out and that every question is answered. They’re all pretty much yes-or-no questions, and that the answers to the yeses are sufficient.
3. East Bay Purchase Agreement Addendum
Additionally, you’re going to want to see something called the East Bay Purchase Agreement Addendum. Now those are the responsibilities of the point of sale ordinances. Many people know, for example, the Sewer Lateral Ordinance. If it’s not in compliance, either it has to be done at the close of escrow by the seller or, it’s often deferred for six months on the buyer side of the deal. So you always want to make sure you understand that.
4. Supplemental Reports such as Roof, Chimney, Foundation, or HVAC Reports
Once you’ve worked your way through those documents, you should also look at any supplemental reports. Try to look for any reports regarding the roof, chimney, foundation, or HVAC. Check out if any of those are available. Or, try to find out if there were things called out earlier by some of those past home inspectors.
5. Natural Hazard Disclosure Report
The other thing you should also look for is the Natural Hazard Disclosure Report. This report shows you where the fault lines, the flood zones, the leaking underground storage tanks (LUST) sites, etc., are. It will show you those types of things or details about the property. Also, make sure you understand what’s around or near you. Try to research what your house is situated on and what’s above or below it. Understanding these details will give you a good sense of the property you are trying to buy.
6. HOA, CC & Rs, Preliminary Title Report, and Easements
Then, of course, there are reports or documents based on the location that also need to be considered. Check for things such as the presence of an HOA, CC & Rs, different preliminary title reports, easements, etc. That will give you the remaining bulk of your inspection report.
For your due diligence checklist, you can start with the first five documents.
You might be telling yourself, “That’s a lot of stuff!” Yeah, I know that’s a lot. So, at a very high level, I would recommend starting with the first five documents I told you about. If you’re reading some of this stuff, try to begin with those documents: look for the home and pest inspection, the two seller disclosures, and the East Bay Purchase Agreement Addendum.
Get through those documents first and try to assess what you feel about them. Assess if you’re comfortable with the condition and what’s been disclosed. If you do, you can then dig into some of those other more dense, longer documents. Doing that would make sure that there are no hidden things in the fine print. Right?
If the first five documents pass the sniff test and you feel good about them, go to the next one.
But before you really give this your final stamp of approval, here’s something you absolutely need to understand. You and your agent both need to be sure that you feel good about who did the inspections. In other words, make sure that both of you are confident in the ones who did the reviews. Okay?
It’s because not every inspection company is created equal. For example, suppose you have an inspector from Livermore and you’re looking at a house in Alameda. That may or may not be a red flag. And vice versa, if you have a San Francisco inspector coming over to Berkeley, that may or may not be a red flag. So what I want to point out here is to find out who did the inspection and the reports. Try to get to know them as much as possible. How reputable are they? How often do they inspect that neighborhood or that geography? Your agent should be able to point you in the right direction on this. So make sure you absolutely talk to them.
A tip for you if you're a seller: Please do not order any inspections until you talk to your agent to verify that you know what you're talking about.
The one thing that trips buyer’s agents out the most is when they don’t know the brand or the name of the inspector. Know that they’re used to seeing a certain brand or group of inspectors in a particular geography. So, when they see something they’ve never seen before, it freaks them out because it’s a different format. Also, that gives them a lower confidence rating to endorse that to their seller or buyer. As a result, that buyer might feel a little bit hesitant about writing you a big or great offer. Those things seriously matter. So make sure you’re picking up on who the right and best inspectors are for your geography and your neighborhood. It may also do you good if they have a track record there as well.
Finally, go through all the consideration items and the section two items.
Do not just skim through the action items and say, “Oh, these are the five things you need to take care of.” Look at the secondary, tertiary items, or the things that they pointed out for consideration. You might find some vital details in there that you can cross-reference with the seller’s reports. It might even make you say, “Oh, we might need to do a secondary inspection on the roof.” Or, “We might need to test holes or something.”
It is imperative to have a look at those things. It’s because while they get marked in a certain way on those reports, they may end up being worth $10,000-$50,000 in a lot of cases. And you absolutely do not want to miss those things. Make sure you’re taking your time and you’re going through it. This is especially true when you’ve found a property you’re very excited about. After all, that’s just an hour or two of effort and due diligence that you will be so thankful that you went through.
I hope my blog on "Due Diligence Checklist and Tips" has helped you.
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