When you're navigating the North Carolina real estate market, two terms that you'll often come across are "earnest money" and "due diligence fee." These are vital components of the home buying process, and understanding their role can help you make informed decisions. In this blog post, our agents look at earnest money vs. due diligence fees by explaining the difference, why they're important to both buyers and sellers, and how they impact real estate transactions.
What is Due Diligence?
The term "due diligence" refers to a period during which the buyer has the right to inspect the property, conduct a title search, get an appraisal, and ensure everything is as it should be. The due diligence time period is usually stipulated in the purchase contract, and it's an essential part of the home buying process. The length of the due diligence period varies but is usually between two to four weeks.
During the due diligence time, the buyer has the right to negotiate with the seller to fix any issues discovered during the home inspection, termite inspection, or any other inspections or to even back out of the deal entirely. This period provides the buyer with a safety net, ensuring they don't end up with a property that has hidden problems or issues that could affect its value or livability.
What is the Due Diligence Fee?
The due diligence fee is a nonrefundable fee that a potential home buyer pays directly to the seller. It gives the buyer the right to change their mind for any reason within the due diligence period. According to West & Woodall REALTOR® Debra Mangum, "That could be because they don't like what they found during an inspection, or they don't get their loan. It could also be that they just changed their mind, and they want the house next door more.” If the sale goes through, the due diligence fee is treated as a payment toward the overall cost of the house for the buyer at closing.
The due diligence fee is important to sellers because it compensates them for taking the home off the market during the due diligence period. Without this fee, if a buyer backs out of the purchase before the end of the due diligence time, the seller has to start back at the beginning of the process and has lost time for the house to be on the market.
Understanding Earnest Money
West & Woodall REALTOR® Jeanette Hussey explains that potential buyers pay earnest money (sometimes referred to as the earnest money deposit) when they're making an offer to purchase a house. The payment represents their good faith intent to buy the home. If the buyer terminates the deal for any reason by 5:00 p.m. on the due diligence date, the earnest money is refundable. If they back out of the contract after the due diligence deadline, they don't get the earnest money back.
According to West & Woodall REALTOR® Brooke Fulford there are two types of earnest money. There is initial earnest money and additional earnest money. The difference is that initial earnest money is paid within 5 days of signing the contract, and additional earnest money is paid at an agreed-upon date stated in the contract.
How Much is the Due Diligence Fee?
At the height of the 2021-2022 hot seller's local market, our agents saw $50,000-$100,000 or more being paid in due diligence fees. Now that the market has cooled off a bit, the amount really depends on the price point of the house. West & Woodall REALTOR® Amy West says that since the due diligence fee is a negotiated amount, in some cases, "it can be in the range of $1,500, $3,000, or $5,000. In cases in which the home is in the right location and has a high amount of interest and offers, the due diligence can go from $10,000 up."
Brooke echoes that as being her experience. "The higher priced the home, the more I am seeing in due diligence fees. If there are multiple offers on a house, I am still seeing upwards of $50,000. I have also had a few go under contract with $5,000 in due diligence, though a lot of times the seller asks for at least $10,000."
When thinking about the due diligence fee, it’s critical to remember that it is not refundable if the buyer walks away from the property at any time. Once it is paid to the seller, it belongs to the seller, and it is immediately theirs to do with as they please. If the deal goes through, the fee becomes part of the purchase price of the home.
How Much is Put Down for Earnest Money?
The amount that is put down for the earnest money is typically a percentage of the purchase price of the home. Jeanette notes that "It is usually 1-3% of the sale price." So for a $400,000 home, the earnest money would be $4,000 - $12,000.
While that has traditionally been the typical amount, West & Woodall REALTOR® and Co-Owner Bert Woodall adds that “there are situations where no earnest money is put down because the buyer has already committed themselves with a higher due diligence amount.”
How and When Are Due Diligence and Earnest Money Paid?
Potential buyers can pay both the due diligence fee and earnest money in cash or by personal check, certified check, or by wiring funds. Brooke says that the closing attorney typically holds the earnest money in an escrow account. At closing, it is credited toward the purchase of the home.
Due diligence fees have to be payable and delivered to the seller by the effective date of the contract. If you do not have the money upfront when the house goes under contract, the seller will move on to the next buyer.
The Role of a Real Estate Agent in Earnest Money and Due Diligence
A real estate agent can play a critical role in navigating the complexities of earnest money and due diligence. They can provide guidance on how much earnest money to offer and how to negotiate the due diligence fee.
In addition, a real estate agent can help coordinate the various activities during the due diligence period, such as property inspections and title searches. That's why having a knowledgeable and experienced real estate agent can be invaluable in ensuring a smooth and successful real estate transaction.
Wrapping Up: Earnest Money vs. Due Diligence Fees
When it comes to earnest money vs. due diligence fees, understanding their roles and how they work can make your home buying experience smoother. Remember, each market has its norms, so the amount of earnest and due diligence money can vary. Make sure to talk to your real estate agent about how these costs fit into your budget and home buying process.
How to ask us a question
Our agents or other trusted local experts answer your questions every month through the Ask a REALTOR® series. If you have a real estate question, we’d love to hear from you at marketing@westandwoodall.com.