What is “Due Diligence”?
One simple definition found online—“The investigation and verification of the details of a particular investment”. It’s a term derived from the legal world of securities regulation and later from commercial real estate. Now, especially in sophisticated real estate markets such as Telluride, it allows a buyer to investigate property under contract before the buyer commits to close on the property.
What difference does Due Diligence make?
The conduct of a buyer’s Due Diligence can make all the difference in the soundness of a real estate investment, and the use and enjoyment of the property. A physical inspection of the property, by a qualified and experienced inspector, is only the beginning. From there, a buyer should investigate:
- Survey issues, including recorded and unrecorded easements, encroachments, and other boundary issues
- Title issues
- Zoning issues
- Building code issues
- HOA issues
- Neighborhood issues, such as obligations to reimburse neighbors or developers for paving or other infrastructure costs
- Architectural and engineering issues, including view corridor preservation
There could be other areas that a buyer should investigate, depending on the nature of the property. A real estate broker working with a buyer can make a huge difference in the competent conduct of a buyer’s Due Diligence, using the broker’s education and experience to direct the buyer into areas the buyer may not have thought about, and directing the buyer to engage qualified experts to study the property and the buyer’s intended use of that property.
True Stories from Telluride
Consider these examples of due diligence gone wrong in the annals of Telluride real estate:
Whoops, wrong property!—A buyer instructed his broker to prepare an offer on a lot on the golf course. The broker did as instructed, a contract with the “seller” was reached, and closing occurred. But there was a problem. The lot the buyer purchased wasn’t the one he wanted. The broker had mis-identified the buyer’s intended lot and pursued the wrong seller.
Whose tree is that, anyway?—Buyers walked a lot with their broker, and decided to purchase it partially because of the existence of an old growth pine tree. After the purchase, the buyers’ architect let them know that the tree wasn’t on their property. It belonged to the adjacent neighbor. The broker was using a plat that had been superseded years earlier, and the lot line had changed.
What golf course?—Buyers looked at homes in winter, decided on and purchased something to their liking, and found out the next summer that they were subject to incoming errant golf balls. When asked why the broker didn’t say something, the broker responded that it would have “confused them”.
Take-away from this?—You should engage a real estate broker who will competently and candidly assist you in the conduct of your due diligence prior to the point at which you commit to close on a property. Real estate brokers whose background is tending bar or waiting tables may not have the necessary experience or skills. It only makes sense to engage a real estate broker with significant education and experience in real estate matters. It doesn’t cost you any more to deal with a real professional.
I am a retired lawyer with many years experience as a lawyer in real estate matters, and now I also have many years experience as a real estate broker in Telluride. My education, skills, and experience are exactly what you want on your side as you consider an investment in the Telluride area. –Mike Wentworth