Earnest Money and Due Diligence Money: What is the difference?
If you are in the market to purchase a home, you have probably already started looking into how you will pay for it. Most buyers are prepared to take out a mortgage, but did you know there can be upfront costs before the purchase is even official?
North Carolina law allows due diligence money and earnest money to be negotiated as part of the home buying process. Once you have found the perfect home and the seller accepts your offer, due diligence money and earnest money will be negotiated and paid by the buyer as a sign of good faith.
While both due diligence money and earnest money aim to protect the seller during the transaction, they are separate payments subject to different uses and rules. Here, we will examine these two types of fees and explain how they differ, while ultimately serving the same purpose: protecting the seller.
What is Due Diligence Money?
As soon as the contract is signed, the “due diligence” period begins. This is a negotiated amount of time during which the buyer may complete any necessary inspections or other research needed to feel comfortable moving forward with the purchase. The due diligence period usually lasts from fourteen to thirty days, allowing plenty of time to schedule the home inspection, termite inspection, and appraisals.
Due diligence money is a fee that buyers proffer at the time they make an offer on a home. In essence, it is the buyer’s good faith payment to the seller. During the due diligence period, the seller pulls the home off the market while the buyer completes inspections. The buyer has this time to review inspections reports and HOA bylaws and rules, negotiate repairs, and take any additional action needed to make a final decision as to whether to move forward with the purchase. The purpose of due diligence money, then, is to compensate the seller for the period for which he or she removed the home from the market. When a seller pulls the house from the market and the prospective buyer subsequently decides not to purchase the home, the seller could have missed out on another buyer during the time the home was off the market. Due diligence money is a good faith acknowledgement to show the buyer’s intent to purchase the home while offering the seller compensation should the deal fall through.
Due diligence money is an upfront payment, so it is usually paid within twenty-four hours of the seller accepting the buyer’s offer; however, the buyer has up to five days from the date the contract is signed to make the due diligence payment. During the due diligence period, the buyer may decide not to move forward with the transaction. When this happens, the due diligence payment is forfeited. The due diligence payment is only refundable when the sale does not move forward at the seller’s decision. If the buyer decides to purchase the home, the due diligence amount is ultimately credited toward the purchase of the home.
What is Earnest Money?
Like due diligence money, earnest money is another good faith payment to show the seller that the buyer is serious about purchasing the home. Earnest money is a negotiated percentage of the contract price, often around one percent.
Rather than being paid directly to the seller like the due diligence fee, the earnest money is held in escrow by an agreed-upon escrow agent until closing. If the seller is unable to fulfill the contract, the earnest money is refunded to the buyer. If the transaction proceeds to closing without issue, the earnest money is credited toward the purchase price to complete the sale.
Unlike the due diligence fee, the earnest money is refundable if the sale is canceled within the due diligence period. If the buyer decides not to buy the home after the due diligence period and before closing, both the due diligence money and earnest money are forfeited.
The Due Diligence Fee is Not Earnest Money.
While neither due diligence money nor earnest money is mandatory in North Carolina, most contracts negotiate to include both. Due diligence money is non-refundable, whereas earnest money is refundable if the buyer decides not to buy the home within the due diligence period. Earnest money is usually a much larger amount than the due diligence fee. Due diligence money is typically between five hundred and two thousand dollars, whereas the earnest fee is a percentage of the purchase price of the home. In cases where there are multiple offers on a home, some sellers will consider the due diligence amount in deciding which bid should win the war.
Both the due diligence money and earnest money are credited toward the purchase price at closing. There is no due diligence period when purchasing new construction, but earnest money applies whether the home is new construction or an older model requiring substantial renovation.
To review, here are the key things to remember about due diligence money and earnest money:
|Due Diligence Money· Non-refundable· Negotiable amount· Not required· Sign of good faith· Paid directly to seller· Credited to purchase price||Earnest Money· Refundable within due diligence period· Negotiable amount· Not required· Sign of good faith· Held in escrow until closing· Credited to purchase price|
Every state has different rules, so while both a due diligence fee and earnest money are permitted and common in North Carolina real estate transactions, if you are looking for a home outside of North Carolina these may not apply. Always consult your realtor or real estate attorney for what to expect in your transaction.
Contact Our Team
In North Carolina, a real estate attorney is an essential partner in your home purchase process. Our experienced real estate attorneys are here to ensure that your transaction goes according to plan. At Strauch, Green & Mistretta, we are committed to delivering the best possible results for our clients and take pride in offering superior legal counsel. Give us a call or reach out to us online to learn more.
This article does not establish an attorney-client relationship and must not be construed as legal advice.