Defects, Due Diligence, and the Deal Killer

Once you are under contract to purchase a home in Georgia, you enter the due diligence period, during which you, as a buyer, does all relevant inspections and investigations and ultimately decide whether or not you would like to proceed with the sale.  This is very buyer-friendly, since during this period the seller is bound to the buyer and cannot enter into other contracts for the sale of the home (except as back ups)– but the buyer is free to terminate the contract with no penalty.

This due diligence period is relatively new in Georgia.  We used to have “inspection periods” instead.  In the former version of our purchase and sale agreement (with the inspection period rather than the due diligence period), it was tougher for a buyer to get out of a contract once she or he had entered into one - to terminate the contract, the buyer had to find a defect in the property through the inspection, ask the seller to fix it – AND the seller would have to refuse to fix it for the buyer to get out of the contract.  If the seller agreed to fix all defects, the buyer was bound and would be liable for breach of contract if they failed to proceed.

If as a buyer during this inspection period you decided you wanted OUT of a contract, one tactic was to call in a REALLY tough inspector – like the one known as the “Deal Killer” - and come up with something you knew the seller could not or would not fix.  The Georgia Association of Realtors Forms Committee decided the inspection period created a perverse incentive in that respect.  There was too much litigation over what is or is not a “defect”.   

So they changed our contracts to conform with those of a majority of other states – and now in Georgia we no longer have the inspection period.  Instead we have the due diligence period or the “FREE LOOK” provision.  During the due diligence period, which it typically anywhere from 7 to 14 days, the buyer can terminate the contract for any reason or no reason at all.  They do not have to have found something during the inspection not to their liking, and they do not have to give the seller the opportunity to fix any defects.  They can simply notify the seller that they have decided to terminate.

Thus, it is in the seller’s best interest to keep the due diligence period as short as possible.  That way, if the buyer does terminate, the property can go back on the market quickly and hopefully with little ill effect.  There is always some ill effect when a buyer terminates, however – the next buyer will wonder WHY the first terminated.  Sometimes there is just no good reason.  But the subsequent buyer will be more suspicious, and will devalue the property accordingly.

For the buyer, of course, a longer due diligence period is preferable.   There is really no risk for the buyer.  This creates a different sort of perverse incentive – some buyers will get a property under contract before they have really decided if they want the place or, perhaps, before they have even seen it. This is a particular problem in foreclosure sales, where there are often multiple bids.  A buyer looking for a bargain may make multiple bids on several foreclosure properties, but not even visit those properties until they win a bid. 

To end due diligence, typically the parties will enter into an “Amendment to Address Concerns” – in which the seller agrees to fix or give monetary compensation for repairs needed to the property.