What is Due Diligence?
Due Diligence refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction. The amount of due diligence required depends on the property type and the size of the potential deal.
Sometimes, due diligence also refers to the audit a seller performs on a potential buyer. In this scenario, the seller is looking for anything that would hinder the buyer's ability to make payments or anything that would negatively effect on the seller after the transaction is completed. It is not unlike the vetting a lender does for borrowers applying for commercial real estate loans.