You Know The Offer Price Now What About The Due Diligence Fee And Earnest Money Deposit

Dated: 04/25/2018

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What happens after your offer to purchase a home is accepted? The weeks leading up to closing can either be stressful or uneventful; there may be many unexpected things that come up or, if you’re lucky, it may be smooth sailing. Either way, as either a buyer or seller, knowing what to expect during this period can go a long way for your peace of mind, as well as help you think strategically through the “what-ifs” before they happen.

So, what DOES happen after your offer is accepted? If you are buying or selling real estate in North Carolina, as soon as both parties sign the contract, you enter into what is called the due diligence period. (Most states have something similar, but real estate law and practice vary from state to state, so you should consult with a local real estate expert in your area!)

Once your offer is accepted, the house-hunting has come to an end and it’s time to get down to the particulars of home inspections and repair requests. This can be daunting for many first-time (and experienced) home buyers, and so part of my job as a North Carolina real estate agent is to help my clients navigate what can be a stressful process. To get through due diligence smoothly you need to understand exactly what will happen, what money is on the line when, and what your options are at each stage of the process.

What is the Due Diligence Period in North Carolina?

The due diligence period in North Carolina is a negotiated period of time during which a buyer has the opportunity to conduct their “due diligence” before deciding to move forward with the purchase of the home. For both buyer and seller it can be a tense period of surprises and decision-making.

Usually the due diligence period is somewhere between 14 and 30 days and it begins as soon as the contract is signed by both parties — once you are “under contract.” During this time, the buyer will have a professional home inspection, HVAC inspection, and termite inspection completed. They may also have other inspections such as a septic inspection or radon inspection. Buying an older home may come with a need for additional inspections.

Unless negotiated otherwise, all inspections are paid for by the buyer. (One exception to this is if the buyer is using a VA loan, in which case the buyer is actually prohibited from paying for the termite inspection in all but nine states.) Other items that may be addressed during due diligence include an appraisal, survey, reviewing title documents and deed restrictions or HOA covenants, securing homeowners insurance and obtaining financing.

One thing worth noting here is that the due diligence period does not apply when purchasing new construction.

What Money is at Stake? The Due Diligence Fee

When a buyer in North Carolina goes under contract, they will write two checks; One of these is the earnest money deposit, which we’ll get to in a minute. The other is the due diligence fee. The due diligence fee is a negotiated sum of money, typically equal to a one month's mortgage payment for the property you are purchasing, depending on the home’s price point and a number of other factors. As a buyer, you want a smaller fee because it means less money at stake should you back out of the purchase. You particularly want a smaller due diligence fee if you have reasons to suspect that there may be major problems with the property. However, in a multiple offer situation, a larger due diligence fee may make your offer more appealing to the seller by demonstrating that the you, the buyer, have some cash and are committed enough to purchasing the home to risk a larger amount. As a seller, obviously, you want a higher fee because if the buyer walks away that money is yours to keep.

The due diligence fee essentially compensates the seller for taking their home off the market while the buyer completes their inspections. When the due diligence fee check is submitted, the check is cashed right away by the seller. If the buyer decides, before the end of the due diligence period, not to move forward with the purchase of the home, they can walk away for any or no reason and lose only their due diligence fee. If the buyer ultimately decides to buy the home, the due diligence fee gets credited towards the purchase price. The only instance in which the due diligence fee is refundable is if the seller breaches the contract.

Negotiating Repair Requests During Due Diligence

The due diligence period allows a buyer to discover any items that need repair or are of concern. The buyer will then decide if there are any major repair items they will ask the seller to fix before closing. With the help of their realtor, the buyer has a variety of options to negotiate a deal they are happy with in light of any major discoveries from the inspection.

One option is to simply have the seller agree to fix or remedy items, at their own expense, prior to closing. Another option is to ask for a financial concession from the seller, for the amount necessary to do the necessary repairs, in the form of closing cost help or a reduction on the purchase price. If these options are not workable for both parties, there may be other aspects of the contract that can be negotiated. For instance, the sellers may agree to pay for certain repairs if the buyers agree to the sellers’ preferred closing date.

What is the Earnest Money Deposit?

The due diligence period is over, the inspections are all in, repairs have been negotiated and you are moving towards closing. What if you want to back out of the contract now? This is where that second check comes into play.

The earnest money deposit is a negotiated amount of money that is also submitted once a contract is signed. This check is given to an agreed-upon escrow agent (typically this is one of the two real estate brokerages involved in the transaction) who deposits it into a trust account until closing.

The earnest money deposit can be larger or smaller than the due diligence fee, and can be from a few hundred dollars to one or two percent of the purchase price. Like the due diligence fee, this deposit protects the seller and helps ensure the buyer is “in earnest” about purchasing their property. If a buyer decides, before closing but AFTER the end of the due diligence period, that they no longer want to move forward with the purchase of the home, they can walk away but will lose both their earnest money and due diligence money.

Every State is Different!

I’ve explained how the due diligence fee and earnest money deposit work in North Carolina, and particularly in the Charlotte area. Keep in mind that each state has different real estate laws and that even within a state, conventions may vary among cities and regions. If you are thinking of buying or selling a home, you should seek out an expert real estate agent in your area, and if you have questions about the laws in your state, a real estate attorney will be able to give you the legal advice you need. If you have questions about how the due diligence period works in North Carolina, please get in touch! I’d love to help in any way I can, and can put you in touch with some excellent real estate attorneys here in the Charlotte area of North Carolina.

Jeff Hoover, Realtor®


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Jeffrey Hoover

Real estate is my passion, helping you reach your dreams with an excellent customer experience is my goal. With over 10 years of experience, my business is located in Charlotte, NC one of the fastest ....

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