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Buying real estate is not as simple as having enough money to purchase the property . It requires time and effort to check and make sure that the condition of the property is good and the title is valid before making the final decision . That is what you call due diligence .
In case the buyer discovers that something is wrong with the property , he may give suggestions to the seller so that the latter can act on it by addendum to the contract , or the buyer can decide not to buy the property .
Contractual Due Diligence
There are certain elements within the sales contract or purchase agreement which are critical to the ‘ satisfaction ’ of due diligence . Let ’ s take a closer look at each of them .
Contingencies – Any contingencies which the buyer wants performed prior to finalizing the purchase must be stated on the sales contract . Some examples of these conditions may include : inspections , partner ’ s approval , financing , research of code violations or permits – and , of course , a clear and
marketable title . At the end of the contingencies timeline , the buyer must either release them and proceed with the sale , or cancel the purchase .
Time is of the Essence – Due diligence supported by contingencies comes with a definitive timeline in the sales contract . If the buyer cannot complete his / her due diligence by the deadline , he / she will have to renegotiate with the seller . The seller has the choice whether or not to agree to the extension ; which in turn may compel the buyer to follow through with the purchase regardless , or cancel the contract .
Title Discovery – Whenever you purchase real estate ( especially as an investor ) a marketable title is the most crucial element . Without it , an investor cannot sell or transfer the property . There are several types of title discovery searches which look into a chain of title ; as well as liens or judgments against the property . The following are 2 main types of searches performed ; keep in mind these may go by different names according to the title company and location :
1 . Full Title Search – the most complete of the two , this search checks into everything affecting the property ’ s history . It is the only one that will be used prior to issuance of title insurance , and is of course the most expensive to perform .
2 . Letter Report – a summary of what ’ s on the title ; which reveals any possible liens and judgments .
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