What Is Due Diligence in Real Estate?

Every due diligence question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. A Utah REPC has the Due Diligence Condition selected. The buyer finds unacceptable inspection results and timely sends the required written cancellation notice. What release does the REPC provide?

   • AReturn of the earnest deposit without further written seller authorizationcorrect
   • BReturn of the earnest deposit after the seller signs a release
   • CPayment of half the deposit to the seller as liquidated damages
   • DReturn of the deposit if the seller violated a statutory disclosure duty

   Why: Under REPC section 8.1(b), timely written due-diligence cancellation releases the earnest money to the buyer without further seller authorization. It is a contractual option, so the buyer need not wait for a seller release or prove seller wrongdoing.

   Contracts

   Key term: earnest money

2. 2. A selected Utah REPC Financing Condition allows cancellation after Due Diligence but by the Financing and Appraisal Deadline. The inserted seller-release amount is $2,000 of the $10,000 deposit. The buyer properly cancels under that branch. How much goes back to the buyer?

   • A$0
   • B$2,000
   • C$8,000correct
   • D$10,000

   Why: Under Section 8.3(b)(i), the inserted $2,000 goes to the seller and the remainder returns to the buyer without the further specified authorizations. $10,000 - $2,000 = $8,000. The scenario supplies the negotiated amount; it is not a standard state fee.

   Real estate math (calculations)

3. 3. The Utah REPC selects delivery of additional earnest money and has not been canceled. Due Diligence expires May 4 and Financing and Appraisal expires May 11. What is the delivery deadline for the additional deposit?

   • AMay 11, the later deadlinecorrect
   • BMay 4, the Due Diligence Deadline
   • CMay 18, one week after the later deadline
   • DThe Closing date set in the REPC

   Why: REPC section 8.4 uses the later of the Due Diligence Deadline and the Financing and Appraisal Deadline for delivering the additional earnest money. Here that is May 11; the earlier May 4 date does not control, and the deposit is not deferred to Closing.

   Contracts

   Key term: earnest money

4. 4. A sale contract requires the buyer to assume a service contract only if its terms are approved during due diligence. What should the buyer review?

   • AThe service agreement's obligations and approval deadlinecorrect
   • BOnly the seller verbal description without the service terms
   • COnly the vendor marketing summary without the buyer approval deadline
   • DAn assumption that the obligation transfers automatically despite the approval condition

   Why: A conditional assumption should be evaluated before the approval deadline. Buying the real estate does not erase the need to review the separate obligation.

   Contracts

5. 5. An Alaska recovery-fund applicant has a qualifying judgment but has made no reasonable collection effort. What requirement is missing?

   • AAn agreement to waive all disciplinary proceedings
   • BA second judgment against every Commission member
   • CProof that the licensee has never held insurance
   • DDue diligence to collect and a finding that reasonable efforts cannot collect the amountcorrect

   Why: 12 AAC 64.325(b)(3) requires reasonable due diligence to collect an underlying judgment, award or settlement and a finding of uncollectibility before fund payment.

   Practice of real estate

6. 6. A Colorado broker assumes an independently contracted administrative professional is automatically insured for every task under the broker’s errors and omissions policy. What does Commission Position 20 recommend before engagement?

   • AAssume coverage exists only when the REAP works at the broker’s physical office
   • BAssume all REAP acts are covered because the hiring broker is licensed
   • CInquire whether the policy covers the REAP’s activities; the REAP may need separate coveragecorrect
   • DTreat separate REAP coverage as a substitute for the broker’s own required coverage

   Why: CP20 advises due diligence concerning the REAP’s qualifications, services and liability, including inquiry into coverage under the broker’s E&O policy. It says licensed or unlicensed REAPs may need their own policy. This is a coverage inquiry recommendation, not a claim that every REAP must buy a separate policy.

   Practice of real estate

7. 7. Under Florida's license law, within how many years after the act giving rise to the complaint must an administrative complaint against a sales associate ordinarily be filed?

   • A1
   • B3
   • C5correct
   • D10

   Why: Section 475.25(5) requires an administrative complaint against a broker, broker associate, or sales associate to be filed within 5 years after the act, or within 5 years after the act is discovered or should have been discovered with due diligence. The 10 years in the statute is the maximum suspension period, not the filing deadline.

   Practice of real estate

8. 8. A North Carolina broker receives a $3,000 earnest money check with an offer on Tuesday. The seller accepts the offer on Friday. Under 21 NCAC 58A .0116(b)(3), the check must be deposited:

   • AOnly after the buyer’s due diligence period ends
   • BAt settlement, when it is credited to the buyer
   • CNo later than three days after the seller accepted the offercorrect
   • DNo later than three banking days after Tuesday, while the offer is pending

   Why: For earnest money paid by check or another non-cash instrument with a pending offer, the rule measures the deadline from acceptance: deposit no later than three days after acceptance of the offer. Counting from Tuesday’s receipt applies the general three-banking-day rule, and waiting for due diligence or settlement is far too late.

   Practice of real estate

   Key term: earnest money