The North Carolina Real Estate Commission revised the Offer to Purchase and Contract in 2011 to better protect the consumer. They introduced a new term called “due diligence” to better protect both buyers and sellers. Before 2011, the only money paid upfront was the “earnest money.” No matter if you are looking to buy or sell in the near future, it is vital that you understand the difference.
What is Earnest Money?
Earnest money is money paid upfront to show the “earnestness” of the buyer. It is being deposited into an escrow account. It’s paid by the buyer to ensure the seller is compensated if the buyer backs out from the deal after the buyer’s due diligence period ends. As long as the deal goes through, the earnest money is credited back to the buyer at closing. If the sale doesn’t go so smoothly, the earnest money may be returned to the buyer, provided the contract is terminated during the due diligence period.
Even if a buyer needs to obtain financing to purchase a home, the contract is no longer contingent on financing. The buyer has to secure financing, try to get final underwriting approval during the due diligence period, and then decide at the end of that period if he will close. The money is returned if the buyer’s financing is denied during the Due Diligence Period and the buyer terminates the contract in time. This could happen due to a change in the debt to income ration, a lost job, or appraisal issues.
What is the Due Diligence Fee?
The “due diligence fee” is paid directly to the seller from the buyer and the seller keeps it even if the buyer decides to terminate the contract. If the deal closes, the buyer will have the amount credited to them at closing. Regardless, the amount goes into the seller’s pocket – unless the seller is in breach of contract. If the seller is in breach of contract both, Due Diligence Fee and Earnest Money, need to be returned to the buyer.
Before 2011, there was a big problem for sellers because once earnest money was paid and when a contract was signed, the home would come off the market. If the buyer’s financing fell through at the last minute, the seller was left with nothing but lost time and lost opportunities to sell their home. The due diligence fee was designed to somewhat compensate the seller for time lost on the market.
The due diligence period allows the buyer to handle things, such as inspections, document review, surveys, financing, and appraisals within a certain amount of time. It also allows the buyer to back out for any reason, but they have to do this before the due diligence period ends in order not to lose their earnest money. If they don’t back out before the due diligence period ends, they will not only lose their due diligence fee but also their earnest money.
Over and above the due diligence fee, Buyers could be out the money paid for inspections and appraisal if for instance the requested repairs are not performed by the seller and the buyer decides to terminate. While they may get their earnest money back, they could still be out lots of money for inspections, survey, appraisal, and the due diligence fee.
When you decide to buy a home in North Carolina, you will most likely pay both earnest money and the due diligence fee. Neither amount is mandatory but most contracts these days show both fees. These fees are in place to protect both buyers and sellers and to ensure the buyer and the seller is serious about the transaction. It’s important to understand both and ask your real estate agent if you’re unsure of anything during the buying or selling process.
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