So What the Heck is Due Diligence?
This morning, a happy buyer under contract on one of my listings brought his son and daughter to see the home. They chatted about where they’d put their sofas, his son oooh’d and aaaah’d over his future video gaming space, and his daughter snapped a few pictures of the upstairs so she could start planning out her room decor. He let me know that yesterday he mailed a check for his Earnest Money Deposit to our closing attorney. Then he left a check for $500 made out to my seller on the kitchen counter when he left…his Due Diligence Fee.
If you’re purchasing a home in NC after a purchase in another state or are new to the home buying process, chances are good that a Due Diligence Fee may be new to you. Every state is different, so it is ALWAYS a good idea to chat with a licensed Realtor in your state to make sure you understand the local real estate laws and any contracts you may enter into. At first, due diligence may seem like an unwelcome change from your past experience, but once you understand due diligence and it’s purpose, I think you’ll see that it protects both buyers and sellers in the long run!
Prior to 2011, Earnest Money was the only deposit buyers were responsible for paying up front when going under contract on a home. Earnest Money is paid to show the buyers’ earnest in purchasing the house, and is held in escrow by either the selling firm or closing attorney until closing, at which point it is credited back to the buyer and put toward the purchase price of the home.
But unfortunately, things don’t always work out according to plan. People lose their jobs. Lenders make mistakes. Financial hardships happen. If a buyer’s financing fell through for any reason, the contract was terminated and the escrowed Earnest Money was returned to the buyer. This often left sellers in quite a lurch. They’d taken their home off the market and been waiting for weeks or sometimes months for the sale to close, and then, sometimes at the very last minute, financing fell through, the buyers got their Earnest Money back, and they were left with nothing but lost time, lost potential buyer opportunities, and a lot of frustration.
In 2011, NC introduced the concepts of a Due Diligence Fee and a Due Diligence Period. Now, when presenting an offer on a house in NC, buyers propose a due diligence period, during which they may conduct inspections at their cost and negotiate repairs with the seller. During the due diligence period, the buyer is permitted to back out of the contract for any or no reason, as long as they do so on or before 5pm on the due diligence period end date. Buyers now pay TWO sums of money up front. The first is an Earnest Money Deposit, and the second is a Due Diligence Fee. If the contract goes to close, BOTH sums of money are credited to the buyer at closing toward the purchase. If the buyer decides to terminate the contract within the due diligence period, their Earnest Money is returned to them. However, the Due Diligence Fee is paid directly to the seller and, in the case of termination, is kept as compensation for lost time and opportunity. Should a buyer decide to terminate a contract outside of the due diligence period, the seller keeps BOTH the due diligence fee and the earnest money deposit.
I’m House Hunting in NC…How Much Money Should I Prepare to Pay Upfront?
There is not a specifically required amount of money for your earnest money deposit or due diligence fee. However, Together they typically total approximately 1.0-1.5% of the purchase price, with earnest money generally a bit higher than due diligence. Earnest money would be held in escrow with the selling firm or more often the closing attorney. Due diligence goes directly to the seller, and is considered funds paid to the seller as a courtesy for their taking the home off the market for you to do your due diligence inspections during what we call the due diligence period, which is typically 2-3 weeks.
As the buyer, you are allowed to cancel the contract at any time during the due diligence period for any reason or no reason, no questions asked. If that were to happen, the earnest money held in escrow would be returned to you. However, the due diligence money portion is the sellers to keep, no matter what. If you see the contract to close, both earnest money AND due diligence funds go toward the purchase price of the home at closing.
Example…
Let’s say you offer $400k on a house…
I would suggest somewhere in the ballpark of $4000-$6000 total as a deposit, depending on how competitive your situation was. I advise higher amounts in multiple offer situations or in situations where you are asking for more concessions from the seller, such as a lower sale price, closing cost assistance, etc. This can “make up” a little for those, so to speak.
If no other offers were on the table, I would suggest a total of $4000. This might be broken down into $3000 in earnest money deposit and $1000 in due diligence. Increasing due diligence can also be a way to make your offer stand out as more competitive as well, as it shows additional earnest and commitment to following through. In a multiple offer situation, for example, an increased due diligence fee might make your offer more attractive than another if you are able to put up more cash upfront.
If the offer were terminated during the due diligence period, the earnest money deposit is returned to the buyer, while the due diligence remains with the seller. If terminated outside of due diligence, the seller keeps both.
Are you exploring the option of buying instead of renting? Are you wondering what your current home is worth? If you have additional questions or you are ready to begin the process of buying or selling a home, please contact me at 704-792-8768 or [email protected]. I am happy to help in any way that I can!
