If you are in the market to purchase a home, you have probably already started looking into how you will pay for it. Most buyers are prepared to take out a mortgage, but did you know there can be upfront costs before the purchase is even official? North Carolina law allows due diligence money and earnest money to be negotiated as part of the home buying process. Once you have found the perfect home and the seller accepts your offer, due diligence money and earnest money will be negotiated and paid by the buyer as a sign of good faith. While both due diligence money and earnest money aim to protect the seller during the transaction, they are separate payments subject to different uses and rules. Here, we will examine these two types of fees and explain how they differ.
As soon as the contract is signed, the “due diligence” period begins. This is a negotiated amount of time during which the buyer may complete any necessary inspections or other research needed to feel comfortable moving forward with the purchase. The due diligence period usually lasts from fourteen to thirty days, allowing plenty of time to schedule the home inspection, termite inspection, septic and, where applicable, water well inspections and appraisals.
During the due diligence period, it’s also important to take the time to do some additional research on the home and the area you’ll be moving to. For example, you could drive through the neighborhood to get a feel for what traffic conditions are like or check local crime statistics. It might also be a good idea to scope out the neighbors to find out what they’re like. If there’s a homeowners association, it’s important to understand the way the fees are structured and know the rules that HOA members are expected to follow. Finally, you may want to consider having the property surveyed if there isn’t a survey on record. That way you’ll find out about any issues that could be problematic later. I recommend all my buyer clients specify at least 4 weeks in their Offer to Purchase and Contract. Since due diligence is typically negotiable, it can be extended as long as the buyer and seller agree on a new deadline.
What is due diligence money? While due diligence money is not mandatory in North Carolina, most contracts include it. .Due diligence money is a fee that buyers proffer at the time they make an offer on a home. In essence, it is the buyer’s good faith payment to the seller. During the due diligence period, the seller pulls the home off the market while the buyer completes inspections. The buyer has this time to review inspections reports and HOA bylaws and rules, negotiate repairs, and take any additional action needed to make a final decision as to whether to move forward with the purchase. The purpose of due diligence money, then, is to compensate the seller for the period for which he or she removed the home from the market. When a seller pulls the house from the market and the prospective buyer subsequently decides not to purchase the home, the seller could have missed out on another buyer during the time the home was off the market. Due diligence money is a good faith acknowledgement to show the buyer’s intent to purchase the home while offering the seller compensation should the deal fall through.
Due diligence money is an upfront payment that is made directly to the seller, so it is usually paid within twenty-four hours of the seller accepting the buyer’s offer; however, the buyer has up to five days from the date the contract is signed to make the due diligence payment. During the due diligence period, the buyer may decide not to move forward with the transaction. Any time during the due diligence time frame, a buyer can terminate a contract for any reason or no reason for that matter.
It doesn’t have to be because of a bad inspection, loan, or other obvious problems. When this happens, the due diligence payment is forfeited. The due diligence payment is only refundable when the sale does not move forward at the seller’s decision. If the buyer decides to purchase the home, the due diligence amount is ultimately credited toward the purchase of the home. The due diligence money can range anywhere from $500 to $2,000 or more, depending on the price of the house and whether you’re in competition with other buyers for the same house. For example, in cases where there are multiple offers on a home, some sellers will consider the due diligence amount in deciding which bid should win the war. That being said, if a buyer terminates a contract, the due diligence money the buyer paid defaults to the seller. So when you’re making your offer, you need to think through the process and consider how much money you’re willing to lose if you end up terminating the contract. This is why I recommend a low ‘pay to play’ due diligence fee.
What is Earnest Money? Like due diligence money, earnest money is another good faith payment to show the seller that the buyer is serious about purchasing the home. Earnest money is a negotiated percentage of the contract price. While one percent of the purchase is a guideline, I recommend a lower amount. Rather than being paid directly to the seller like the due diligence fee, the earnest money is held in escrow by an agreed-upon escrow agent, almost always the closing attorney, until closing. If the seller is unable to fulfill the contract, the earnest money is refunded to the buyer. If the transaction proceeds to closing without issue, the earnest money is credited toward the purchase price to complete the sale. Unlike the due diligence fee, the earnest money is refundable if the sale is canceled within the due diligence period. If the buyer decides not to buy the home after the due diligence period and before closing, both the due diligence money and earnest money are forfeited.
The Due Diligence Fee is Not Earnest Money. While neither due diligence money nor earnest money is mandatory in North Carolina, most contracts negotiate to include both. Due diligence money is non-refundable, it is a negotiable amount, it is a sign of good faith, it is paid directly to the seller and is credited to the purchase price at closing. Earnest money is refundable only during the due diligence period. It also is a negotiable amount, and is usually a larger amount than the due diligence fee. It is a sign of good faith on the buyer’s part. It is held in escrow and it is credited to the purchase price at closing. In the end, if you as the buyer go all the way to closing, the due diligence and the earnest money deposit both come back to you at closing as part of your down payment. The only way a buyer can lose everything—both the due diligence AND earnest money—is if you say that you’ll buy the home, but then cancel the contract AFTER the due diligence date. That’s considered a breach of contract, and you’ll receive neither of those deposits back. Generally, if you decide to back out of the purchase after the due diligence period ends, you won’t be able to recover your earnest money unless you can prove that the seller covered up a serious home defect or property title issue. Besides keeping your earnest money deposit, a seller can take legal action against you to recover any money that he or she loses by canceling the home sale. Bottom line: If you’re planning to buy a home, it’s best to take the due diligence period and its requirements very seriously. Otherwise, you could create a mess for yourself that could be difficult to get out of. By the way, there is no due diligence period when purchasing new construction, but earnest money applies whether the home is new construction or an older model requiring repairs and/or possibly renovation. To learn more about the due diligence and earnest monies fees, go to my website, www.EmeraldIsleHomesforSaleNC.com and sign up for my blog. Ready to buy or sell? Call me at 919-308-2292. Explore the video tab for my weekly uploads to my YouTube channel. Subscribe to my YouTube channel and receive free donuts at my Flip Flops Donut shop. Text your email address to 919-308-2292 and subscribe to my newsletter. My book, "Live Where You Vacation" is available on Amazon.com.
Comments