Due Diligence In Residential Real Estate Transactions

Andrew M. McKenzie, Edmonds Lawyer

Many non-lawyers have heard the term “due diligence” in the context of real estate, but the term can feel confusing or legalistic.  Due diligence refers to the investigation, research, and analysis which buyers are expected to perform prior to closing on a transaction, to satisfy themselves that the asset they are purchasing will meet their needs and justify the price paid.  The default rule in Washington State is that a purchaser of real estate assumes the risk of defects and problems associated with the property or its improvements.  For that reason, smart buyers will place less weight on a seller’s representations and more weight on what the buyer can objectively verify prior to closing.

When purchasing residential real estate, buyers ordinarily make the sale contingent upon a physical inspection of the home.  While that is wise, the buyer should not assume that a standard physical inspection will reveal every possible negative fact about the property.  For one thing, most standard home inspectors limit the scope of their services to inspecting only what is easily visible and accessible; that will not necessarily reveal defects behind walls, in the plumbing, in the attic, in the crawl space, etc.  While a home inspector may be trained to spot potential problems, they are not necessarily experts in the trade required to fully assess or fix the problem.  Therefore, buyers should pay careful attention to the home inspection report, and follow up on any hints of potential problems which require further investigation.  You may need to hire another expert to fully assess and understand a potential problem flagged in the initial inspection.  In Washington, the buyer is ordinarily charged not only with knowledge of what the inspector reveals, but also with knowledge of what the buyer would have discovered if the buyer had diligently followed up on flagged issues.  Failing to follow up can be risky and costly.

Some aspects of home inspection are highly specialized and require hiring a specialist.  For example, you will need a septic inspector to confirm the functioning and state of an on-site sewer system.  When competing in this hot real estate market among many prospective buyers, it is tempting to waive the right to inspections, but any buyer doing so needs to appreciate the risk.  If you are a first time home buyer, you should think long and hard before agreeing to waive your right to perform inspections, particularly if the home is older or has signs of deferred maintenance.

Due diligence often involves far more than a physical home inspection.  Reviewing the surrounding neighborhood, nearby development activity, crime rates, surrounding property values, and physical characteristics of the property and surrounding geography is important.  Many prospective buyers envision a remodel, building additional structures, or subdivision of property.  Especially if you are planning to make additional improvements or make changes to the use of the land, it is imperative that you check applicable zoning and investigate the presence of environmentally sensitive areas.  Many counties offer most of this information on a special mapping website which allows you to look up parcel-specific information.  Keep in mind that some environmental information will not show up in public records and may only be discovered by careful physical analysis of the property.  If you are planning any kind of development of the property, such as a remodel, new building or structure, or a subdivision, check with the local jurisdiction (city or county) which has authority to issue building permits to make specific inquiries about any obstacles or requirements for the kind of development you hope to do.  Many buyers fail to make these inquiries, making assumptions that they can build what they want, only to find out after closing that it is either not possible or far more complicated or expensive than they imagined.

Another critical area for due diligence involves issues affecting title to the property.  Buyers should carefully review title reports, surveys, and potential encroachments to make sure there are no surprises after closing.  An experienced real estate attorney can help you review these documents and advise you concerning potential practical implications.

The lawyers at Beresford Booth have extensive experience in real estate transactions, both on the buyer and seller side.  We regularly advise buyers regarding due diligence prior to purchasing.  We would be happy to assist you in your real estate needs.

To learn more about due diligence and real estate transactions, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.

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