Due diligence in real estate is one of the most important, and most often misunderstood, steps in any property transaction. As a Michigan real estate attorney, I am regularly asked to perform a due diligence audit on purchases, sales, and investment transactions. Whether you are buying a single-family home, a commercial building, or an investment portfolio, the due diligence process exists to protect you from making a costly mistake.
In simple terms, due diligence in real estate refers to the reasonable care a buyer or investor should take before entering into any agreement. It is a formal investigation into the material facts, risks, and potential liabilities associated with a transaction. In my experience, the deals that go sideways are almost always the ones where someone cut corners on this process.
This guide walks you through what a real estate due diligence audit involves, why it matters, and how to approach each stage of the investigation so you can close with confidence or walk away when that is the smarter decision.
What Is Due Diligence in Real Estate?
The term due diligence is defined in legal contexts as the care that a reasonable person exercises to avoid harm to themselves or others. In real estate, that translates into a thorough, structured investigation of the property, the people involved, and all the documents governing the transaction before the buyer commits to closing. For a more detailed legal definition, the Cornell Law School Legal Information Institute provides a useful reference.
A due diligence audit, specifically, is a formal investigation conducted by an attorney, buyer, or investor prior to closing. The scope of that investigation varies depending on the nature of the transaction. A residential home purchase involves different considerations than a multi-million-dollar apartment complex. However, the goal is always the same; it ensures you know exactly what you are getting into before you sign anything.
In my practice at Soble Law, I approach every due diligence audit from the perspective that there are three sides to every story. These are the buyer’s version, the seller’s version, and the truth that emerges when an experienced real estate attorney reviews all the evidence. My job is to find that truth before money changes hands.
Why Preparing for Due Diligence Matters
Most buyers understand they need to do homework before buying property. However, understanding why this investigation is so critical is what separates smart buyers from those who end up in costly disputes after closing. Skipping or rushing due diligence can result in purchasing a property with undisclosed defects, unresolved title issues, zoning violations, or financial obligations you were never aware of.
Furthermore, preparing early allows you to set a realistic investigation timeline. Many purchase agreements include contingency periods during which due diligence must be completed. If you are not organized from the start, you can run out of time before you have all the answers you need. Once those contingencies expire, your ability to exit the transaction without penalty may be significantly limited.
Preparation also signals professionalism. When a buyer arrives organized, asking the right questions and demanding the right documents, sellers understand that shortcuts will not be tolerated.
Consequently, buyers who invest in thorough due diligence do not just protect themselves from risk. They also arrive at the negotiating table with far more leverage than buyers who take the seller’s word at face value.
Step 1: Review the Purchase Agreement and Contract
One of the first and most important steps in any due diligence audit is a thorough review of the purchase agreement. This is the governing document for the entire transaction, and it is where the rights and obligations of both parties are defined.
When reviewing the contract, I am specifically looking for several key items. First, I examine the financial obligations and disclosures the seller is required to provide. What has the seller committed to disclosing? What warranties and representations are being made about the property’s condition, title, and financial status? Critically, which of those representations will survive the closing, meaning they remain enforceable after the sale is complete?
Second, I review how the investigation of the property and its finances is supposed to be conducted. What is the timeline for inspections? When do we need to obtain approvals or permits? What conditions must be satisfied before the buyer is obligated to close? The answers to these questions are not just procedural; they are often revealing about the seller’s motivations.
In my experience, a seller who pushes aggressively for a fast closing is a seller worth scrutinizing. It does not always mean something is wrong. However, it can signal that the seller is trying to limit your investigation window. I have seen transactions where an unusually short due diligence period was the clearest red flag in the entire deal. Your real estate attorney should review this timeline carefully and negotiate appropriate time to complete a proper audit.
Step 2: Investigate Title Work and Property Documents
After reviewing the contract, the next step is a comprehensive review of the property’s title and related documents. This is where the paper trail tells its story. In my due diligence audits, the document review phase is often where the most significant problems surface.
Title Search and Marketability of Title
The marketability of title is one of the most critical elements of any real estate transaction. A title search involves examining public records to confirm who legally owns the property. It also determines whether any liens, claims, or encumbrances exist that could affect the buyer’s ability to obtain clear, transferable ownership. Undisclosed liens, judgment liens, or competing ownership claims can render a title unmarketable, meaning the property cannot legally be transferred without first resolving those issues. Turn to resources like provenresource.com/the-top-10-reasons-property-owners-should-have-title-insurance for information on title coverage.
Title insurance is an important safeguard in this context. Even the most thorough title search cannot catch every possible defect. Title insurance protects buyers and lenders from losses that arise from title defects that were not discovered during the search process.
Location Survey and Encroachments
I always request a location survey on any property I review in a due diligence audit. A survey shows the physical boundaries of the property. It can reveal encroachments, which occur when a structure from a neighboring property crosses onto the subject property, or vice versa. Encroachments can lead to boundary disputes that are both expensive and time-consuming to resolve. A current, accurate survey eliminates a significant area of risk before the deal closes. Learn more about these concerns at provenresource. com/how-property-owners-should-deal-with-a-boundary-dispute.
Property Inspection
Whether the transaction is residential or commercial, a qualified property inspection is a non-negotiable part of the due diligence process. A professional inspector evaluates the structural and mechanical condition of the property. This review includes the roof, foundation, plumbing, electrical systems, and heating and cooling equipment. The inspection report gives both parties an objective picture of the property’s condition, and it forms the basis for any repair negotiations or price adjustments. You can read about inspector evaluations at provenresource. com/top-reasons-to-hire-a-home-inspector.
I always advise clients not to rely on an inspector recommended exclusively by the seller or listing agent. Your inspector should be independent, qualified, and working entirely in your interest.
Zoning, Ordinances, and HOA Rules
Understanding what you can and cannot do with a property is an essential part of any due diligence review. Local zoning regulations, municipal ordinances, and homeowners association rules can all restrict how a property may be used, modified, or operated. For example, a buyer planning to run a business from a residential property may find that local zoning prohibits commercial use in that zone. Similarly, an HOA may impose restrictions on exterior changes, parking, rentals, or landscaping. I review these documents during a due diligence audit to ensure my clients understand the full scope of what they are purchasing.
Step 3: Review Financial Documents for Investment Properties
For investment properties and commercial real estate, the financial documentation is one of the most revealing parts of the due diligence process. I review operating agreements, rent rolls, lease agreements, income and expense statements, and any other financial records that show the property’s actual performance. In this context, the phrase ‘trust but verify’ is essential.
I recently worked with a client purchasing a multi-million-dollar apartment complex. The seller wanted a premium listing price but was unwilling to provide lease agreements or a verified rent roll. His operating agreement was poorly maintained, and he had no accountant involved in the transaction. These were not minor oversights; they were disqualifying red flags. The deal fell apart because the seller could not support the numbers he was claiming, and my client was not willing to pay for assumptions.
When a seller refuses to provide basic documentation, that refusal tells you everything you need to know. Legitimate sellers who are proud of their property’s performance are eager to share the numbers.
For buyers reviewing financial records, I specifically recommend examining income statements for at least two to three years, verification of all tenant leases, confirmation of current occupancy levels, utility and operating expense histories, and any outstanding payables or obligations that will transfer with the property.
Step 4: Identify and Investigate Red Flags in Due Diligence
One of the most valuable things an experienced real estate attorney brings to a due diligence audit is the ability to recognize red flags. We can then actually investigate them rather than dismiss them. Red flags are not just problems; they are signals that something in the transaction may not be as represented.
Common red flags I look for during due diligence include the following:
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A seller who is reluctant to provide documentation or delays producing requested records.
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A purchase price significantly above comparable sales without a credible explanation.
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Title issues that surface during the search, including undisclosed liens, clouds on title, or competing ownership claims.
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Inspection findings that reveal deferred maintenance, structural issues, or code violations.
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Discrepancies between what the seller has represented in the contract and what the physical inspection or financial records show.
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Any indication that the seller has withheld material information about the property’s condition or history.
When red flags appear, the appropriate response is not to look the other way in the hope that the deal gets done. The right response is to dig deeper. In my practice at Soble Law, when a due diligence audit surfaces a concern, we investigate it fully before recommending that a client proceed.
Step 5: Assemble the Right Due Diligence Team
Preparing for due diligence in real estate is not a solo exercise. The complexity of most transactions requires a coordinated team of professionals, each reviewing the deal from their area of expertise. At a minimum, most buyers benefit from working with a qualified real estate attorney, a licensed property inspector, and a title company. Depending on the transaction, you may also need a surveyor, an environmental assessor, an accountant, or an appraiser. General legal support options can be reviewed at provenresource. com/real-estate-law.
Your real estate attorney plays a central coordinating role. A good attorney is not simply reviewing documents in isolation. They are synthesizing findings from every member of the team, identifying inconsistencies, and advising you on legal and practical risks before you are committed to a transaction you cannot easily exit.
Additionally, do not underestimate the value of having an attorney review your purchase agreement before you sign it. Many buyers assume the standard purchase form provides sufficient protection. It rarely does. An attorney who reviews your contract early in the process can negotiate provisions that protect you if due diligence surfaces problems or give you the right to exit if the seller fails to cooperate.
What Happens When Due Diligence Reveals a Problem?
Not every due diligence audit results in a smooth path to closing. Sometimes the investigation uncovers problems that need to be resolved before the transaction can proceed. In those cases, you generally have three options: negotiate a resolution with the seller, adjust the terms of the deal to account for the risk, or walk away.
Walking away from a transaction is not a failure. It is, in fact, the entire point of the due diligence process. You invest time and money in this investigation precisely so you have the information needed to make a smart decision. A deal that looks great on paper but falls apart under scrutiny was never what it appeared to be.
Furthermore, your attorney can help you understand your options within the framework of your contract and advise you on the best course of action. This is especially important if you have already deposited earnest money, since the terms of the purchase agreement will determine whether that deposit is refundable based on the results of your due diligence. Specific details regarding financial dynamic issues can be explored at provenresource. com/earnest-money-deposits.
Frequently Asked Questions About Due Diligence in Real Estate
What is due diligence in real estate?
Due diligence in real estate is the process of thoroughly investigating a property’s title, physical condition, financial performance, and legal status before completing a purchase. It is the standard of care a reasonable buyer takes to identify potential risks or problems before committing to a transaction.
What does a real estate due diligence audit include?
A real estate due diligence audit typically includes a review of the purchase contract, a title search, a property inspection, a location survey, a review of zoning and local ordinances, and an analysis of financial documents where applicable. An experienced real estate attorney coordinates and reviews each component.
How long does real estate due diligence take?
The timeline varies depending on the complexity of the transaction. For residential purchases, due diligence is often completed within 10 to 30 days. For commercial properties or investment transactions, the process can take 30 to 60 days or longer depending on the scope of the investigation.
What are common red flags in a real estate due diligence review?
Common red flags include a seller who delays or refuses to provide documentation, significant discrepancies between the asking price and comparable sales, title issues or undisclosed liens, inspection findings revealing structural defects or code violations, and inconsistencies between the seller’s representations and the actual condition of the property.
Do I need an attorney to perform real estate due diligence?
While buyers are not legally required to work with an attorney, having an experienced real estate attorney conduct or coordinate your due diligence audit provides significant legal protection. An attorney can identify risks that a standard inspector or title company may not catch and can advise you on your options if problems arise.
What happens if due diligence reveals a problem with the property?
If due diligence uncovers a problem, buyers typically have the option to negotiate a resolution with the seller, request a price reduction or repair credits, or exit the transaction if the contract allows. Whether earnest money is refundable in that situation depends on the specific terms of your purchase agreement.
Can a seller limit or restrict the buyer’s due diligence?
A seller can propose limited due diligence windows or restricted access to documents, but buyers should resist unreasonably short timelines or documentation gaps. Sellers who are unwilling to cooperate with reasonable due diligence requests are often signaling that something in the transaction does not hold up to scrutiny.
Soble Law helps clients identify where real estate and business deals break down, define the legal risk, and take control of the next step.
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About David Soble: David is a seasoned real estate and finance attorney with more than 35 years of experience, combining his background as a “big bank insider” with a commitment to demystifying complex legal issues for his clients. As the founding attorney of Soble Law (Soble PLC), he leads a specialized team in Michigan and Ohio that handles real estate transactions, contract disputes, probate, and financial litigation. Known for a practical, no-nonsense approach and peer-rated excellence (Martindale-Hubbell AV Preeminent), Soble and his team strive to protect clients’ property and financial interests with clarity, integrity, and experience.
Disclaimer: The information in this article is for general educational purposes only and does not constitute formal legal, financial, tax, real estate, finance, probate, or any other professional service or advice. Reading this content or contacting us does not establish an attorney-client relationship. Every situation is unique, and laws change frequently, so you should always consult with your own qualified attorney or professional advisor before making any decisions.
