Due Diligence in Real Estate Transactions

Commercial and residential transactions have different customs and practices when it comes to inspecting the property, conducting due diligence, and considering whether the transaction is desirable or advisable for buyers. All buyers of real estate in Oklahoma should conduct sufficient due diligence because it is highly unlikely that an Oklahoma court will reverse or undo a real estate transaction once closed. 

Usually the parties must be under contract before due diligence may begin. Otherwise, the buyer may waste money conducting property due diligence that otherwise would not need to be spent. Additionally, pre-contract physical inspection due diligence could cause the seller to have liability if there is an accident or injury on the premises. If due diligence is allowed to begin before purchase and sale agreement is signed, the parties should agree to basic non-disclosure language. 

There are three primary types of real estate transactions during which due diligence should be conducted: commercial transactions, residential transactions, and auctions or sheriff sales. Each type of transaction is unique and buyers should obtain as much information as possible before agreeing to buy these properties. 

The following sections walk through most standard pre-closing due diligence items for real estate purchases. 

Seller disclosures: In Oklahoma residential real estate transactions, sellers are required to make certain disclosures regarding the physical condition of the property. See our article on the Oklahoma Residential Property Condition Disclosure Act. In commercial transactions, no pre-contract disclosures are required; however, most commercial property sellers will offer to provide the supporting documents from the most recent transaction of that specific property.

Physical inspections: All buyers should use licensed and experienced inspectors. Residential buyers should use home inspectors who communicate well and provide ample written feedback on their findings. Commercial buyers should expect to conduct a Phase I environmental site assessment (known as a “Phase I” or an “ESA”) to ensure no environmental concerns exist on site, an ALTA/PIN survey to ensure no boundary encroachments encumber the property, and any additional inspections which can provide the buyer with certainty, such as electrical, plumbing, HVAC, and other specialists. 

Treatments, repairs, and replacements: If the physical inspection of the property exposes conditions requiring attention, the buyer can typically request that the seller make a few of those repairs prior to closing. See our article on TRRs in residential transactions. 

Reinspect after modifications or TRRs: If the parties are still within the due diligence and inspection period, and possible even if not within this period, the buyer should reinspect the property after work is performed. The buyer may still have the right to terminate the purchase if work insufficient. Additionally, the buyer may be able to request more or better quality work. 

Terminate Based on Physical Inspections. Most buyers, both residential and commercial, have the right to terminate their transaction based on unsatisfactory results of a physical building inspection. Be sure to review our article on terminating a purchase and sale agreement.

Paper inspections: Inspecting the property can also come in the form of reviewing legal title and encumbrance documents, as buyers accept all documented legal title issues when they complete closing. These documents often include a mortgage inspection report and a title commitment for title insurance, also known as a “title report.” Other documents which should be reviewed prior to closing a real estate transaction are receipts for recent repair work, the current lease agreement with the tenant (if applicable), a tenant estoppel certificate (if applicable), liens, easements and rights of way, etc.

Our firm routinely reviews title reports and other title company documentation. If the title company or our attorneys find an issue which requires action, such as a quiet title lawsuit, lien invalidation, or obtain a release of mortgage, we can take quick action to begin resolving the problem. See our article on quiet titles in Oklahoma. 

Contact Avenue Legal Group to discuss your transaction or obtain help with due diligence.