Avery and Ayers Blog

The New Due Diligence

Due diligence is a term used by the legal community to describe actions and investigations related to purchase or approval. To simplify, making sure prior to your transaction you receive what you think you are receiving. Examples of real estate due diligence may include:  property valuation, legal verifications, inspections and mortgage examination. In today's real estate market "buyer beware" mantra has evolved to cover issues never seen in our lifetime. With 90 transactions in 2009 and 50 transactions so far in 2010, Avery-Ayers & Associates real estate team have experienced unprecedented challenges with some transactions. Item's such as, stolen A/C units, black mold, Chinese drywall, methamphetamine contamination, predatory lending, record foreclosures, and oil spill threats have complicated our local home buying process.

A valuable statistic in choosing a home are the property comparables or "comps". Appraisers, Realtors and Tax Assessors continually study property values with data collected from prior sales. A licensed real estate agent with a Sarasota or Manatee Realtor Association membership qualifies as a "REALTOR", enabling access to sort and download these useful statistics. Local knowledge and experience along with these tools provide the Realtor an objective baseline for home values across various neighborhoods. Although primarily used to price a home for resale, comps can be a huge advantage to a buyer as an investment tool and negotiating leverage. After being pre-qualified and your price range determined, your Realtor can guide you with information on values in your prospective neighborhoods. As homes are previewed as possibilities, the Realtor can provide the comps related to the prospective home providing a comparative market analysis, also known as a CMA. This analysis can be used to compare the sold values of relevant properties to assist buyers in the bid offer process. It is far too common in today's market that a lenders appraisal falls short of the agreed upon sales price. By understanding the history of prices in a neighborhood the buyer can objectively make a decision based on a factual representation of value and the historic trend of that value.

Other due diligent research tools available are the local county property appraiser and clerk of court websites. Properties and owners can be researched for red flags such as ownership discrepancy, tax issues, property line problems or foreclosure action on neighboring homeowners. Additionally, prior to the offer, we recommend introducing yourself to adjoining neighbors. As a prospective buyer you need to have the knowledge and a comfort level with prospective locations. For obvious reasons this becomes more apparent in higher density locations such as condominiums and townhomes. Also, your due diligence should include any deed restrictions, Home Owner Association (HOA) covenants or Community Development Districts (CDD) that are relevant to your prospective nieghborhood or subdivision. Your Realtor should have these details available for your review prior to the transaction.

Another important due diligence task is the termite and general home inspections. These inspections are done after the offer is excepted, prior to closing. Sometime, mortgage lenders require a termite inspection. Termites in Florida are common, the subterranean variety is by far the most destructive. With the exception of extreme damage, termites and termite damage are treatable and generally a minor inconvenience in the home buying process. The general home inspection prior to closing is a proactive step, at the expense of the buyer, to verify the condition of the structure and all related systems. A reputable independent inspection service should provide a compressive report in a timely fashion and will deliver it to the buyers promptly after the inspection is completed. The home inspection report will alert buyers to such items as hidden defects, substandard workmanship, obvious building code violations, and other items to assess the condition of the home and property. For older homes, built using old school cast or clay pipe, we recommend an additional sewer inspection to verify functional integrity. Inspections can occasionally be deal killers, if the negatives outweigh the positives. If repairs are necessary, the buyer can provide estimates of cost as a negotiating tool to ask for repairs to made by the seller or to receive credit at closing to make the repairs after closing. If the contract is an "as is" contract, the inspection is still relevant, as a buyer will have an objective view point for decision making.

Lastly, if you plan to finance your home purchase, be aware of predatory lending. Currently, the mortgage and banking industry is in the process of damage control. Negative publicity of such topics as bailouts, credit default swaps, systemic risk, and predatory lending have created distrust in our system. The federal government is slowly coming to grips with the issue of consumer protection, though currently the fed has it's hands full with curtailing foreclosures and bank insolvencies.

Predatory lending is a relatively new term to home buyers and is part of the new due diligence.  HUD has published the following as current examples of predatory lending:

As the demand for transparency continues choose a reputable, knowlegilbe lender. Always review the terms of your note as soon as possible. Be proactive by understanding types of loans and the details. Ask questions. If you are uncomfortable with the answers, you should have a real estate attorney review your documents prior to closing.

Real estate ownership can be a rewarding investment and a great asset for your family's future. Performing proper due diligence prior to your transaction can remove the unknowns and risks related to valuation, overlooked items, defects, location adversity or other possible misrepresentations. Using an experienced, professional Realtor to consult you through the process can put you well on your way to happy homeownership.  

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