Is Due Diligence Necessary?
“What is Due Diligence and is it Necessary?”
When using borrowed money buying a residential, business, commercial, or industrial property, lenders always require some form of due diligence before committing to lend money. They always want an appraisal, and a title search and title insurance that are paid for by the borrower. They may require a survey, a phase one environmental study, a physical inspection report, and a septic system report if there is a septic system. These additional reports are also paid for by the borrower. This process can be expensive.
Naturally, a lender wants to be sure that the asset being pledged as security for their loan is not encumbered by judgments or other legal liens, or environmental risk, and that improvements are in good condition.
But what if you’re buying with cash? Do you still have to perform due diligence? The short, technical answer, is no — but the right answer is yes. So is due diligence worth the cost?
When Buying a Property Think About Selling It
People buying a property are usually not thinking about selling that property at the time of purchase. After closing on a deal, buyers become responsible for any environmental issues, any liens, and any structural defects that exist. There are exceptions where a seller has intentionally concealed defects, but proof is difficult. So, the buyers must protect themselves by performing due diligence before they close.
Remove an Underground Oil Tank
Recently a seller was required to remove an underground oil tank as a condition of a buyer going forward with a home sale. There was an oil tank on the property that had been closed in place many years earlier. It was done properly and an inspection certificate existed. But when the tank was removed, as required by the new buyer, a trace of oil was found in the soil directly under the tank that had not been discovered when the tank was abandoned. The sellers incurred an additional cleanup cost of over $10,000 before they could conclude their transaction. If they had the tank removed, rather than closed in place, they would have not faced this last minute cost.
Shed Building Over the Line
In another case, a buyer did not want to pay to have a survey made of the property he was buying. When a neighbor moved in next door, the neighbor had a survey made that showed a shed building near the edge of their property that was actually over the line. That buyer neighbor required that the trespassing shed be removed. So the first buyer lost the shed where he kept his lawn mower and other yard equipment. If the first buyer had a survey when he bought his property, he could have required that the shed be moved fully onto the property he was buying, or he could have sought a reduction in his purchase price.
Performing due diligence before closing can avoid delays, greater costs, and strife after the closing.