So you're thinking about buying a house in North Carolina?
Or maybe you're in the process already and just have no idea what the difference between due diligence and earnest money is but your agent told you that you needed it. Or maybe you do know the difference but it's been a few years since you've been in a real estate transaction and just need a refresher. Don't worry, I've got you!
In North Carolina, we essentially have two separate down deposits to put on a home when getting an accepted offer and going under contract. These deposits are called "due diligence fee" and "earnest money deposit". They are both negotiable amounts and show to the seller how serious you are about buying their house.
Lets start with due diligence...
Due Diligence
The due diligence fee is usually a smaller amount than the earnest money and is given directly to the seller. The fee is due at the time of an accepted offer. This fee essentially buys your "due diligence period" which is a set timeframe that allows you to do any and all inspections on a home, negotiate for repairs and agree to move forward. Think of the fee this way "Hey seller, thank you so much for taking your home off of the really hot real estate market for me, to do a series of inspections and to make sure I am comfortable with purchasing your home".
Due Diligence period- this is a negotiated period of time that allows the buyer to do inspections, negotiate repairs and either continue forward with the transaction OR back out of the contract entirely with no questions asked. This period of time is usually between 7-21 days. As you just read, when a buyer is in their due diligence period, they have the opportunity to back out of the contract for any or no reason at all and walk away. The due diligence fee then becomes forfeited. However, the earnest money is usually returned as long as the buyer backs out before their due diligence period ends. You can see how this could be a disadvantage to the seller as they are taking the home off the market at this time to accommodate for buyer inspections. If the buyer backs out after say 21 days, well that was 3 weeks that the seller lost time on the market to look for other interested buyers. That is where the due diligence fee comes in play as the seller gets to keep it in regards to their lost time on market.
Earnest Money
The earnest money deposit is essentially a small downpayment for the house. It is also looked at as a "good faith" deposit showing the seller that you are serious about buying their home. This deposit it usually about 1% of the purchase price and is held in a trust account by either an attorney or a listing firm. This deposit is either due at the time of an accepted offer or within 5 days of an accepted offer, whichever one has been agreed upon. The earnest money can be refunded in an event that a buyer backs out of a contract within their due diligence period. However, if a buyer waits too long and their due diligence period expires, then they may forfeit their earnest money and the due diligence fee and may be responsible for other legal actions.
Where do these monies go?
If a buyer decides to continue forward with a transaction and purchase the home, both the due diligence and earnest money will be credited back to them at closing. Both of these fees are not included in the purchase price but rather additional deposits.
Here is an example
June 1- Offer accepted
June 1- Due diligence fee due
June 5- Earnest money deposit due
June 21- Due diligence period ends- *Earnest money becomes non-refundable after 5:00pm this day
June 30- Settlement day/Closing
