Due Diligence. Is it only for big corporate acquisitions?
October 12, 2021
Frank J. Delle Donne
“Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate on the decision at hand and all its costs, benefits, and risks.” Due diligence – Wikipedia
Like any purchase of significance due diligence is important and you probably don’t realize it but you already do it to a much, much simpler degree. Do you compare performance information and mileage for a new vehicle you may be considering buying? That’s due diligence. Do you compare school districts or the time to commute to and from work for the new home you’re thinking of buying? That’ due diligence. And of course, the purpose of this piece is to make sure that you recognize that a home inspection is a critical aspect of your home purchase due diligence.
By law, the home inspection is a non-destructive inspection of various systems and components of the home. Exterior, roof, electrical elements, baths, etc. We at Regal Home Inspections, LLC, of course, follow the law to the letter of the law and we strive to surpass the bare minimum as required. For example, the law requires we check 1 outlet per room and one window per room. If accessible, we usually check as many as we can, not the minimum. The purpose of this piece however it not to review the home inspection due diligence that Regal Home Inspections, LLC does but what you may want to consider (Or we may recommend) beyond the scope of the NJ home inspection standards of practice. To that point, I am also licensed by the NJ DEP (License # 59628B) to inspect for wood destroying insects and prepare the industry recognized, “Termite Report”. Both my son & business associate and I are also licensed to conduct radon measurements (NJ DEP Radon Measurement Technicians) MET14070 and MET13186 respectively.
You may not realize it but you’re already paying for elements that fall under due diligence. The title search that you’re doing. The appraisal that the mortgage company may require. The appraisal is more due diligence for the lender than it is for you, the buyer. While I’m talking about the lender, when they verify your income and credit rating, that’s part of the business due diligence of them making the loan to you.
There are things beyond those that we do as home inspectors (Inspection, termite and radon) that we sometimes recommend and sometimes urge you get as part of your home purchase due diligence. As of now we don’t do them but we can refer you to good companies that do.
- An oil tank sweep. Oil tanks were common for many years. Going back decades, natural gas was not as prevalent as it is today. In the past, houses may have been heated with electric or oil if natural gas wasn’t available. There are many houses still heated with electricity and there are still some with oil. However, it’s the ones that no longer have oil but did that we’re concerned with. What do the sellers know and is it accurate? Years ago it was OK to have an old oil tank cleaned and abandoned in place. However, as I’ve heard, insurance companies will charge a higher premium if the property has an abandoned oil tank. If the property you’re considering buying as an old tank decommissioned and left in the ground, INSIST, that it be removed by the seller. You absolutely do not want to purchase the risk and liability of an underground oil tank. An oil tank sweep is relatively inexpensive and worth every penny. Usually the cost is between $275 and $450 depending on the size of the property.
- Sewer scope analysis. Information suggests that up to 80% of the waste pipes from the house to the sewer connection have some type of issue. It could be roots that have grown into the waste pipe. Bellies where there’s a dip in the pipe that can collect waste and hinder good drainage. Breaks in the pipe, cracks or holes. Often, a family of 4 or 5 is buying a house from an original owner where one person has been living in the home for years. Years earlier there was a family but as the children grew up and moved out, eventually, like me and my wife, there are two people living in the home. The water use for an older couple or a single, older occupant is very, very different than for a family of 3, 4 5 or more. The waste pipe from the house may be able to handle the one or two loads of laundry a week and a few showers a week for the older occupants but when the young family moves in and there are multiple showers and baths a day and multiple loads of laundry a day, etc. The corroded waste pipe is no longer able to handle the waste water volume of the young family as it could for the older couple. A video, sewer scope analysis of the sewer pipe is worth it’s weight in gold.
Financially, for both the oil tank and sewer scope, you’re talking about $300 for each to be sure vs. many thousands of dollars to repair. Is it 10 to 1? $300 vs. $3000? No, it could be more like 30 to 1 or 50 to 1. That’s $9000 to repair or $15,000 to repair and quite possibly more.
In conclusion, think of your home purchase as a business acquisition and your duty is to perform all of the reasonable due diligence needed. The home inspection is #1. DO NOT WAIVE YOUR HOME INSPECTION! #2 Think about some other, important services: Radon test, termite inspection, oil tank sweep, sewer scope analysis, lead paint, mold and pools. Anything that’s important to you should be part of your home purchase due diligence.