If you are buying or selling a home in the greater Triangle (Raleigh/Durham) market, you will either hate or love this fee!
When you purchase a home in North Carolina, the Offer to Purchase lists two different fees that are due at the time of contract. The first is a due diligence fee, and the second is an earnest money deposit. Both of these fees are used to show how serious the buyer is about finishing up the contract and truly buying the property. These fees are also tied to a pre-closing date called the “due diligence date.”
Unless you have bought a home in North Carolina within the last few years, the concept of a “due diligence fee” will seem like a peculiar idea. As Realtors who sell the Raleigh/Durham area, we spend a lot of time trying to explain this unique process, so we will try to provide some good insight. If you still have additional questions after reading this blog post, please don’t hesitate to reach out. We are just using a list of our most common questions.
- What is due diligence, and why is there a fee? Our NC Offer to Purchase and Contract paperwork allows the buyer to specify a period of time that they will take to review everything they need to learn about the property before ownership is turned over to them. This investigation is called the due diligence process. It’s the time when a buyer completes the appraisal, gets insurance in order, and does all inspections. A fee is paid by the buyer to demonstrate that they are serious about the process of buying the house. This fee is paid directly to the seller. The money gives the buyer the option to walk away if they find something they’re not happy with, or for no reason at all.
- Is the due diligence fee the same as the earnest money fee? No, it is not the same. The due diligence fee is a fee that is paid directly to the sellers. The fee is separate from the earnest money fee. If a buyer decides to do both fees, they will be writing two checks. One check will be considered an “earnest money deposit,” It will go in a trust account, and it will be held in trust by the realty firm or a lawyer. The second check is the “due diligence fee,” and that check will be made directly to the house owners. A big difference with the earnest money deposit is what happens if the buyer cancels the contract. If a buyer terminates before the due diligence date, the earnest money is refunded to the buyer. Still, if they wait until later in the process, the earnest money will also go directly to the seller.
- So, if I pay the due diligence fee, why should I pay the earnest money fee? Nothing is mandatory. It’s customary, and things that are customary change as the market shifts. There may be times when sellers are expecting minimal due diligence and no earnest money or any other combination.
- What is the purpose of the earnest money deposit if the due diligence fee already protects the seller? The Earnest money deposit is like second insurance to the seller. If a buyer cancels before the end of the due diligence timeframe, they’ll get the earnest money back, but if the buyer waits for the last minute and pulls out a day before closing, this earnest money deposit will go directly to the seller. It provides an additional fee to help compensate if a buyer takes advantage or fails to act in a timely manner.
- Will I get a credit for the due diligence fee and/or the earnest money when I close on the property? Absolutely. As long as you complete the transaction, all fees and deposits will show up as a credit to the buyer at the time of closing.
- Exactly how does the due diligence fee protect the sellers? The contract will state a length of time for the buyer to do inspections, appraisals, etc. This is called the “due diligence time period.” If a buyer decides to walk away from the contract, then the due diligence fee will help compensate the sellers for the time they tied up with this seller. The seller can put the home back on the market after that first contract cancels, but now it might be tainted because other buyers may wonder why the contract fell through. Sellers may have to correct pricing if they experience this kind of issue or at the least, they’ll get lots of requests to explain why the original buyer left.
- What does this “due diligence” fee do for the buyer? The due diligence fee provides the option for the buyer to walk away from the deal for any reason. The buyer doesn’t need to convince the sellers that they are walking away for a good reason. Sellers can use the due diligence fees to pay for another month of the mortgage on their loan, get a home staged after they moved out, or it could compensate for the inconvenience of having to go back on the market and cover any potential decrease in perceived value because the first contract fell through.
- Are the due diligence fee and the earnest money deposit mandatory? You can make any offer that you want. It’s your decision. Ask your Realtor to help you understand what is happening at the time that you buy. It’s easy to figure out what to do when you know what sellers will expect. As with any offer, you can listen to information, but you should always do whatever YOU feel comfortable with. It’s your offer.
- Is there a standard percentage or number that I should put for either the due diligence fee or the earnest money deposit? No, the market shifts, and those shifts create customs about how much sellers are expecting. In strong seller’s markets, the seller will anticipate larger due diligence fees. When sellers have lots of competition and too much inventory, the amount will decrease because the buyer will be more in control. It’s important to make sure you’re talking to a seasoned Realtor as they can advise you about what they are seeing in the market and help you make an educated decision about what you are comfortable with.
- Has this due diligence fee option always been on the contracts in North Carolina? No, before we had a due diligence option, agents would need to write in a number for the expense of repairs that would allow a buyer to walk away. Then we had to get quotes for those fees so that you could demonstrate that the house repairs met or exceeded the limit the buyer had noted. So, termination of the contract was tied to repairs. It took us a little while to convert to the idea of a due diligence fee. When the “due diligience fee” first showed up, most of our buyers understood and loved it because it allowed them to walk away without having to demonstrate a reason why they wanted to walk.
I’m writing this in May of 2021 in the middle of a seller’s market, and right now are expecting significant security so that this due diligence fee can be expensive for buyers. Strangely, even with the strong due diligence fees, many buyers are still doing weird things like using these fees to hold property until a better house comes along, at which time they’ll put in an offer on the more appealing option. Sellers may be able to sell their property quickly because there’s less inventory, but they still need to be concerned that their buyer will follow through and not cancel. You’d think the cancellations would be decreasing as these fees go up, but that isn’t what we see at all. We actually see an increase in cancellations.
I hope all this helps you understand the process of due diligence a little better. If you have questions about the realty market in the greater Triangle area, please don’t hesitate to reach out to us. You can contact us at https://www.triangletrusted.com/contact-us.