A Common Fee and Deposit in Home Buying

Earnest and Due Diligence NC

There are lots of costs that may be unfamiliar to first-time home buyers. Earnest and due diligence money in NC are two costs that are likely, but not mandatory since both are negotiable with the seller.

Be sure to ask your real estate agent what typical amounts are for each and what the rules are for forfeiting or getting that money back in case the sale does not go through! Each state has their own laws.

Due Diligence Period

Once a buyer and seller have entered into a contract, the due diligence period begins. This time, usually a minimum of two weeks but can be any negotiated period of time, is for buyers to gain access to the home to perform all fact finding and investigations to ensure they understand what is being purchased. It is typical for buyers to have inspections, appraisals, and surveys conducted during this time while also gathering and reviewing other information like home owner association rules and covenants.  In some states, it is also the time to secure financing through a mortgage lender, especially if the sales contract does not have a financing contingency clause (again, consult your real estate agent and attorney as needed).

Information uncovered during due diligence can be used as leverage by the buyer to either ask for a discount of the purchase price or for necessary repairs to be completed. The due diligence period is the time when buyers have the highest negotiating power.

Due diligence money acts as compensation to the seller for taking their home off the market while the buyer completes these tasks. Commonly, the buyer writes a personal check directly to the seller for anywhere from $200-$2,000 but the amount is 100% negotiable and not mandatory. It is important to note that due diligence money is usually non-refundable unless the seller breaches the contract.

Buyers want the lowest due diligence and earnest money deposits, while sellers want high amounts.

Earnest Money

Earnest money is often referred to as “good faith” money and is typically paid once upon acceptance of the contract and possibly a second round specified at a later date. Earnest money is usually a higher amount than due diligence and might range from 1-2% of the purchase price. In hot real estate markets, agents may encourage buyers to increase this amount when placing an offer to have it be more competitive in relation to others.

The money is paid to the escrow agent, which is usually one of the real estate firms involved in the transaction, who deposits it into a trust account. It is important to note that earnest money is usually refundable through the due diligence period but becomes “hard” or non-refundable after due diligence unless the seller breaches the contract.

Buyers can negotiate that any earnest money will not be paid until after the due diligence period has ended. Negotiating a no or low due diligence deposit and earnest money paid after that is the best-case scenario for buyers.

Every State is Unique!

Each state has their own real estate laws which impact the rules and use of due diligence and earnest money. Please check with your own real estate agent and/or attorney to confirm how it applies for your situation!

 

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