What Is a Due Diligence Fee?

Ask a REALTOR®

If you haven’t bought or sold a house since 2011, you may not know what a due diligence fee is. Even if you do know what it is, if you haven’t dealt with the Triangle residential real estate market during the past five years, you probably don’t have any comprehension of what this fee has become.

We’re talking $50,000, $100,000, even $200,000 that is needed when you make an offer on a house. What’s more, this money will not come back to you if the sale doesn’t go through – for any reason. That’s why if you’re planning to buy or sell a home in this market anytime soon, you need to have a full understanding of what the due diligence fee is and what it isn’t.

What is a Due Diligence Fee?

The due diligence fee is a nonrefundable fee that a potential buyer pays directly to the seller. It gives the buyer the right to change their mind for any reason during 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, or it could be that they just changed their mind and they want the house next door more, and it comes on the market.” If the sale goes through, the due diligence fee is treated as a payment toward the overall cost of the house.

For those who haven’t been in the market for a long time, it’s easy to think that the due diligence fee is the same as earnest money, but it’s not. The due diligence fee is paid directly to the seller and is nonrefundable. Once it’s paid to the seller, they can put it in their bank account and do anything that they want with it. It is theirs.

West & Woodall REALTOR® Jeanette Hussey explains that earnest money is paid by the potential buyer to show that they are serious about buying the house. It is usually 1-3% of the sale price and is held in an escrow account by the buyer’s closing attorney until the deal goes through. If the buyer terminates the deal for any reason by 5pm on the due diligence date, they get the earnest money back. If they terminate the deal after the due diligence deadline, they lose the money.

Why is There a Due Diligence Fee?

You might be wondering at this point why a due diligence fee was needed if we already had earnest money in place. Debra says that when the fee was put into effect in 2011, “It was to provide something to the seller for their time off the market because we were going through a period where a lot of people were putting a contract on a house and then they couldn't qualify for their loan for one reason or another.”

For the seller, Jeanette remembers that meant potentially losing four to six weeks with the house off the market with the possibility of getting no compensation for that time or losing other interested buyers if the sale didn’t go through. To help offset that potential loss of marketing time for the property, the due diligence fee was put in place to help show that the buyer was serious about seeing the deal through.

Since there is no set amount required for a due diligence fee, the fees in the beginning were minimal because, as Debra acknowledges, “We really didn’t know what to do with it.” Now though, she says, with the market as hot as it is, “It’s just kind of gone completely the other way, where the seller has all the power.”

How Does the Due Diligence Fee Work?

In the Triangle’s current market, both Debra and Jeanette say that there are important things to keep in mind regarding how the due diligence fee works and how it will affect the home buying process.

Due diligence fees have to be paid in cash or by personal check, certified check, or wired funds at the beginning of the transaction.

It has to be payable and delivered to the seller by the effective date of the contract. If you do not have the funds on hand when the house goes under contract, the seller will move on to the next buyer.

They are nonrefundable.

We’ve said that several times already, but it bears repeating. It doesn’t matter how much money you commit toward the fee; it will not be refunded for any reason if the sale does not go through.

Due diligence fees are not required, but you will not win a bid without it in this current market.

With so many buyers willing to pay it, there is no reason for a seller to accept an offer without it.

Homes are being sold “as is.”

You can still have an inspection done, but the seller may or may not agree to do any of the work because there are so many other potential buyers who will take it as is. Both Jeanette and Debra say that they encourage their sellers to address any major issues found in an inspection, but there is no obligation for them to do so. Jeanette adds that if something major is found in an inspection and you don’t buy the house, it does become a disclosure item for the seller. “That means that for the next potential buyer, even if the seller doesn’t disclose it, their agent has to because they are obligated by the real estate commission to do so.”

The due diligence period is often being waived by potential buyers, which means that earnest money is not required.

Debra says that she has many clients that waive the due diligence period because they know that they’re accepting the house “as is” anyway. They’re combining what would have been their earnest money with the due diligence fee to create an offer that is as attractive as possible to the seller.

There is no such thing as a standard due diligence fee.

You can, though, expect to pay $50,000 - $100,000 and in many cases, it’s even higher. Essentially, the fee is however much it’s worth to you to make sure that you get the house.

Tips for Buyers

Navigating the current real estate market can be challenging, especially with high due diligence fees. Here are a few tips to help buyers:

1. Financial Preparation: Ensure you have the necessary funds readily available for both the due diligence fee and the down payment.
2. Work with a REALTOR®: A knowledgeable REALTOR® can guide you through the process, help you make competitive offers, and negotiate effectively on your behalf.
3. Home Inspections: Even with homes sold "as is," it’s important to get a thorough home inspection to understand potential issues.

Advice for Sellers

As a seller, understanding the dynamics of the due diligence fee can help you make informed decisions:

1. Setting Expectations: Be clear about your expectations regarding the due diligence fee to potential buyers from the start.
2. Disclosures: Address any major issues found in inspections upfront to avoid complications later in the process.
3. Evaluate Offers: Consider the entirety of each offer, including the due diligence fee, earnest money, and terms of sale, to choose the best one for your needs.

Market Trends

Understanding current market trends can provide insight into why due diligence fees have become so significant:

1. High Demand: The Triangle area is experiencing a surge in demand, leading to competitive offers and higher due diligence fees.
2. Low Inventory: With fewer homes on the market, buyers are more willing to pay substantial due diligence fees to secure a property.
3. Investment Potential: Many buyers see the Triangle as a lucrative investment, driving up the amounts they are willing to pay upfront.

How to ask us a question

Our agents will be answering your questions every month through the Ask a REALTOR® series. If you have a real estate question that you want answered, we’d love to hear from you at marketing@westandwoodall.com.