Due Diligence Fee & Earnest Money Deposit - What's the Difference?

In North Carolina real estate transactions, there are two commonly used aspects of the contract negotiation process that can confuse clients and customers who are not well versed in their differences and how they interact with one another. It is important for both buyers and sellers to understand both "Due Diligence" and "Earnest Money" so there is clear communication and understanding by all parties involved in the transaction.

Due Diligence

You will hear "Due Diligence" used to represent a few different, but connected ideas within a real estate transaction.

One way it is used is to represent the broker's responsibility to discover and disclose all material facts, or important information that may impact a buyer's decision to purchase the property or not. As a special agent for their client, the broker is responsible for doing everything in their power and authority to protect their best interests.

Another way "Due Diligence" is used is to represent a negotiated period of time for a buyer to investigate the property and decide whether they will follow through with purchasing the property or terminate the contract without penalty.

The third way you will hear it used is as a financial fee - the "Due Diligence Fee." This is the fee used to secure the period of time for a buyer to investigate the property and make their decision.

For the sake of this article, we will primarily be discussing the fee and period of time when referring to "Due Diligence."

What do you need to know about Due Diligence?

The Due Diligence fee is a non-refundable fee paid by the buyer directly to the seller to secure the right for the buyer to investigate the property and decide if the buyer wishes to purchase the property or not. It is not required for a valid contract, but it usually used in North Carolina real estate negotiations.

The amount of the fee and the duration of the period are included in the offer to purchase submitted by the buyer to the seller. There is no set fee amount or time period, the buyer makes this decision based on their own comfort level and taking market trends into consideration. You should discuss these with your broker to help you choose what is best for you.

During the Due Diligence period, buyers will commonly use the time to investigate many different aspects of the property, including but not limited to:

• Title evidence

• Seller's deed

• Whether there are any encumbrances on the title

• Home inspection by a licensed inspector

• Soil suitability test

• Land survey

• Current lease contracts (when applicable, if the property is being leased)

• Negotiation of personal property that they buyer would like to include in the purchase, or fixtures that the seller would like to retain

If you decide to continue with your purchase of the property after the Due Diligence Period, the Due Diligence Fee will be credited towards the purchase of the property at closing.

If you decide to terminate your contract and not purchase the property, you must submit a written notice of termination by 5:00 PM on the Due Diligence Period expiration date. In the event you decide to terminate the contract before the end of the Due Diligence Period, generally your Earnest Money Deposit will be returned to you but the Due Diligence Fee will not. The Due Diligence Fee is generally non-refundable, with a couple exceptions under special circumstances.

Due Diligence Quick Summary

The Due Diligence Fee secures the right for a buyer to investigate a property for a period of time and determine whether they want to purchase the property or not.

Earnest Money

The Earnest Money deposit protects a seller by securing a financial deposit in the event that a potential buyer decides that they want to terminate the contract. When going "under contract", a seller is no longer actively pursuing another buyer, so the Earnest Money deposit is intended to compensate for this time that could be used to find another buyer in the event that the buyer terminates the contract.

What do you need to know about Earnest Money?

The Earnest Money deposit is a refundable amount provided by the buyer, into a trust bank account, to be dispersed to the appropriate party once the end result of the contract has been determined.

• If the buyer decides to terminate the contract within the Due Diligence Period, the Earnest Money will return to the buyer.

• If the buyer decides to terminate the contract after 5:00 PM on the Due Diligence Period expiration date, the Earnest Money will be provided to the seller.

• If the buyer decides to complete the contract and purchase the property, the Earnest Money will be credited towards the purchase of the property at closing and provided to the seller.

The amount of the deposit is included in the offer to purchase submitted by the buyer to the seller. There is no set deposit amount, the buyer makes this decision based on their own comfort level and taking market trends into consideration. You should discuss this with your broker to help you choose what is best for you.

Earnest Money Quick Summary

The Earnest Money Deposit is a good faith deposit provided by the buyer into a trust account to be provided to the seller in the event the buyer defaults or terminates the contract outside the Due Diligence Period.

After years in advertising and marketing, living and working for companies in Georgia, North Carolina, and China, I decided to acquire my real estate license so I can use my established marketing and communications skills to help others and work for myself.

For many people, buying and/or selling their home is one of the most important and most stressful times of their lives. Having an advocate and an agent who has experienced years of corporate marketing, managing teams through challenging projects with tight deadlines, and negotiating complex deals - will aid in the home buying or selling process.

If you or anyone you know is interested in real estate investment, a personal real estate search, or property management, please reach out to me directly - I would love to provide my services to help find your goal property as soon as possible.

Bo Hardegree, NC REALTOR®
Espin Realty
[email protected]
704-748-0958