2019-11-23
What is a due diligence fee and an earnest money deposit?


It's critical to understand what a due diligence fee and an earnest money deposit means when buying real estate in North Carolina.  In a nutshell, when you make an offer to purchase real property they are dollar amounts you add to show how serious you are about purchasing. While they are not required, they are always always negotiable.  Below, we'll dive deeper into these 2 concepts to understand them and know why you need them to get your offer accepted.

You've found the house you want.  Now it's time to write an offer.

When writing an offer in North Carolina you need to include how long you need to conduct due diligence.  This time frame is negotiated with the seller to allow the buyer the opportunity to perform any and all investigations of the property, and to ensure all the provisions of their loan are met. The due diligence period begins with the effective date of the contract (when all parties have signed and the buyer has been notified that the seller has done this) and ends on the date agreed to by both parties.  The buyer must be sure that the period of time is long enough to conduct any and all inspections, land surveys, etc., to be sure they want the property.  The time must also allow for the loan officer (if there is one) to process the loan and order an appraisal.  The average time frame is 30 days.

 How much is my due diligence fee?

The due diligence fee is paid by the buyer directly to the seller. The fee, if any, is negotiated between the buyer and seller to allow the buyer time to do their due diligence as noted above. There are certain factors that influence the amount of the fee, and they include the desirability of the home, the condition of the home, the number of days the home has been on the market and the price of the home. Once the contract is signed, the home will be listed as 'under contract' and is essentially off the market, so the seller needs to be compensated for that if the buyer decides not to proceed.   You are essentially buying time.  Your real estate agent can help you determine how much to offer.  The check is due when the contract is accepted.  If the buyer decides, before the end of the due diligence period, they do not want to buy the house for any or no reason then they can walk away and only lose their due diligence fee.  If the buyer decides to ultimately buy the house then the fee gets credited towards the purchase price at closing.  The only way the fee is refundable is if the seller breaches the contract.

What is earnest money?

The earnest money deposit is essentially a down payment on the house.  This check is made out to the closing attorney and held in their trust fund.   You have no more than 5 days from the effective date of the contract to get this to the attorney.  Like the due diligence fee, it is a negotiated amount but is much larger.  It may be one or two percent of the purchase price.  It shows how 'earnest' you are about purchasing the property.  This money comes off your bottom line at closing- just like the due diligence fee.  It can only be refunded if you exit the deal
before the end of due diligence.  If you decide to walk away from the deal after due diligence ends, then you lose this money (and the due diligence money).  

I'm here to help you navigate through this process!

I can help you decide how much to offer in terms of due diligence and earnest monies.  Sure, you could offer none as part of your offer to purchase, but the seller and seller's agent will have little incentive to take your offer- especially if it's up against another offer that includes those monies.  The seller wants you to have 'skin in the game.'  There is an art to this, and no two deals are the same.







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