Understanding Due Diligence Money in Real Estate

Table of Contents

Two Different Deposits?

In the realm of home purchases, every state has its own unique approach to handling deposits. North Carolina, for example, requires both an earnest money deposit and a due diligence fee. Interestingly enough, neither of these deposits are legally required, yet they are still expected. The decision to provide these deposits often depends on market conditions. So, what exactly are they, and how do they differ from each other?

What is the Due Diligence Fee?

The due diligence fee is a payment made out to the seller, to be delivered on the day that both parties sign the contract or within 24 hours. The fee is then directly deposited into the seller’s personal account. This payment is intended to compensate the seller for the period of time when the property is taken off the market for the buyer’s due diligence process. The amount of this fee typically depends on the price of the home and the length of the due diligence period. It’s important to note that in North Carolina, a buyer has the right to walk away from the purchase for any reason whatsoever. If the buyer does choose to walk away, the seller retains the due diligence fee. This remains the case even if inspections reveal serious issues or if the appraisal comes in significantly lower than expected and the seller refuses to negotiate. However, if the seller breaches the contract, the due diligence fee can be returned to the buyer.

Understanding the Earnest Money Deposit

In contrast, the earnest money deposit is made out to an escrow agent. This could be the listing agency or a real estate attorney. The money is then deposited into an interest-bearing escrow account held by the escrow agent. The purpose of the earnest money deposit is to demonstrate to the seller that you are genuinely committed to the purchase. If you proceed with buying the house, the earnest money will be credited back to you at the settlement. However, if you choose to walk away during the due diligence period, you may have the opportunity to reclaim the earnest money deposit. On the other hand, if you decide to back out after the due diligence period, the seller is entitled to keep the earnest money deposit.

Considerations & Complexities

As you can imagine, sellers typically prefer a larger due diligence fee since they get to keep it if the buyer backs out of the purchase. Conversely, buyers often prefer a smaller due diligence fee just in case they change their minds.

It’s important to note that neither of these deposits are legally mandated. However, in certain market conditions, both types of deposits may be expected when purchasing a property.

In Summary…

To summarize, the due diligence fee serves as compensation to the seller for taking the property off the market during the due diligence process. On the other hand, the earnest money deposit is intended to demonstrate your commitment to the purchase. While the earnest money deposit may be returned to the buyer depending on the circumstances, the due diligence fee is non-refundable unless the seller breaches the contract.

Does all of this sound a bit overwhelming? That’s completely understandable. This is precisely why having a professional real estate broker by your side is crucial. Don’t go through this process alone. You need an experienced buyer’s agent to protect your interests every step of the way.