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Buying

What Is Due Diligence? Find Out What to Do Before Buying a Home

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Person Hand With Magnifying Glass Over Luxury House (Copyright: Andrey Popov)

Once you make an offer on a home and it's accepted, there's a period lasting a few weeks before you close the deal. During this window of time, buyers are often told to "do their due diligence" on the home they soon hope to own. But just what is due diligence, anyway?

In the world of real estate transactions, due diligence is a fancy term for "do your homework." Before buying a property, you should fully investigate it for potential problems that could cost major money to fix after you've moved in.

"Due diligence in residential real estate means [making sure] you're getting the asset you're paying for," says Larry Anweiler, an Arizona real estate broker who teaches real estate at Kaplan University.

Think of this as your last opportunity to kick the tires, turn on and off all the lights -- and generally make sure you're not getting a lemon. And if you do find flaws, you've got time to negotiate with the seller, who could help you fix them or lower the home price. Or, if the seller refuses, you are free to walk away from the deal -- and as long as you've placed some contingencies in your contract, you won't have to forfeit that hefty deposit.

Due diligence is definitely worth taking seriously, so here's a checklist of what you'll want to scrutinize before closing the deal.

A home inspection

Most home buyers hire a home inspector to scrutinize the house top to bottom, looking for problems that could cost the buyer major money to fix. The inspector is looking for a crumbling foundation, faulty HVAC systems, termites, leaking roof, and other potential big-ticket problems.

You should also hire a separate professional to test for biotoxins, including mold, radon, and asbestos. These hazards are typically not checked by a home inspector and are expensive to fix. You should also check for larger neighborhood issues that could have an impact, like whether your home lies in a flood zone or near some environmental hazard. These can all be reasons to reopen negotiations with the seller and, if you're not satisfied, prompt you to walk.

A title search

Before you can " take title" to the home -- a fancy way of saying you establish legal ownership of the property that's entered into public record -- you'll want to do a title search to make sure you can indeed do that, free and clear.

For instance, what if the previous owner's long-lost brother shows up claiming he owns the property, or a creditor has placed a lien on the home due to unpaid debts, or there are unresolved boundary disputes with a neighbor? Such problems can be costly to address, and a title search will bring them to light so you can broach these issues with the seller before you inherit a problem you don't want to have.

If you're buying a condo or property within a homeowners association, you'll want to thoroughly review its declaration of covenants, conditions, and restrictions, or CC&Rs. Basically this is the list of rules and regulations, as well as fines for infractions. Some can be quite strict, reserving veto power over the color you paint your home or the number or type of vehicles you can have in front of your house (RVs are sometimes banned).

Given these are rules you'll be living under for the foreseeable future, it's wise to review them and make sure you're on board -- and if not, you can back out with your deposit in hand.

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