Is Your Due Diligence Period Long Enough?

Is Your Due Diligence Period Long Enough?

A purchase and sale contract is an essential part of any land transaction. It outlines the steps of the transaction in a way that both the buyer and seller can both understand. And when obstacles arise during the transaction process, both parties will look to this contract to determine which steps to take. One of the most important parts of a purchase and sale contract is the due diligence period. What is a due diligence period? Is yours long enough?

What is a Due Diligence Period?

A due diligence period is a period of time in which the buyer can review title matters and physically examine the property. If there are structures on the property, zoning as well as structural exams of the property will take place. A survey of the land as well as title commitment will also be examined. During this time, the buyer will also take steps to finalize any loans that will be used to purchase the property.

As a buyer, you may face issues during your due diligence review, but how many and the types of issues you’ll face will depend on what type of property you’re purchasing. With raw land, for example, there are few concerns. However, if you’re purchasing farmland, you may need to think about environmental and survey matters.

If you’re purchasing land, some risks you need to consider include:

  • Title issues
  • Hazardous waste issues
  • Survey issues
  • Land use approvals
  • Property access
  • Utilities available onsite, including gas, sewer/septic, water, Internet access and cable TV
  • Any physical issues with the property, such as flood hazards and slope stability

It’s impossible to anticipate every source of risk, but proper due diligence will help minimize the risk. And you’ll hire experts to help you thoroughly assess the property. The only question is: do you have enough time to complete your due diligence review?

Is Your Due Diligence Period Long Enough?

When negotiating your sale and purchase agreement, make sure that you’ll have enough time to complete an entire review. Sellers will push for as short of a due diligence period as necessary, but you may realistically need as much as 120 days to complete a full review of the property. This is especially true if environmental reviews need to take place. If you’re working with a lender to finance the purchase, they will want to wait until these issues are resolved before finalizing the loan.

If you need to obtain zoning approvals, the process can be lengthy. It’s crucial to ensure that you have a realistic window of time to obtain these approvals.

Ensuring that your due diligence period is long enough is essential if you’re serious about purchasing a property. If you fail to complete the review before the period is over, you will be forced to either terminate the contract or ask the seller for an extension. If you terminate the contract, you lose the property to another buyer. If you ask for an extension, the seller may tack on fees for carrying costs. This may mean paying a monthly fee to the seller or making an additional earnest deposit.

If you’re unsure of how long the due diligence period should be, consult with a real estate professional for guidance.

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