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    A Crash Course on Due Diligence Fees and Earnest Money

    To gauge how wild the NC market is, look no further than due diligence fees.

     

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    What’s the difference between the due diligence fee and the earnest money deposit? We get this question a lot because our North Carolina market is a bit quirky in that, here, the buyer’s initial deposit on a home is split into two.

    One portion is called the due diligence fee, which is basically the fee you give directly to the seller. It’s a non-refundable deposit; it’ll be credited to you at closing, but you’ll never see that money again if you back out of the deal.

    The other portion is called the earnest money deposit, which is deposited with a third-party escrow agent (typically the closing attorney). If the buyer backs out of the deal during the due diligence period, they will get their earnest money deposit back.

    You’re probably wondering why we do things this way. A while back, we were just like every other state in that we required one deposit—the earnest money deposit. If the buyer backed out, then you’d have to argue about who was entitled to that money. Was there a good enough reason to back out of the deal? Is there something wrong with the property? If the parties couldn’t agree, then they’d often wind up in court. The case would hinge entirely on the buyer’s reason for backing out.

     

    “If the buyer backs out of the deal during the due diligence period, they will get their earnest money deposit back.”

     

    Nowadays, the reason why you backed out doesn’t matter at all. In fact, if you back out of a transaction during the due diligence period, you don’t even have to tell the seller why you’re backing out. As long as you back out during that crucial due diligence period, you’ll lose your due diligence fee but you’ll get your earnest money back. If you back out after the due diligence period has expired, you’ll lose both. This split-deposit system is easier; there aren’t as many arguments that go to court.

    The due diligence fee is so important in today’s fast-paced, low-inventory market. If you find yourself up against 20 other offers on a home you love, you must have a very, very large due diligence fee. It’s the only way to stand out to sellers in a multiple-offer situation. Essentially, it’s your way to communicate to the seller that, come hell or high water, you won’t back out—you’re in it to win it.

    When due diligence fees first started in 2011, we were seeing them at around $500, or maybe $750 max. Now, we routinely see them at $10,000, $15,000, and even $20,000. Remember: These are non-refundable deposits that people are making. If for whatever reason, they had to back out of the deal, they’d lose it all. As a buyer in 2021, that’s what you’re up against. This is precisely why you’ll need professional help.

    If you need an experienced real estate team in your corner or have more questions about this topic, don’t hesitate to give us a call or send an email. Despite the craziness, we’re still helping our buyers win while protecting their financial interests. We’d love to learn about your specific needs and craft a plan to help you win.

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