When you’re ready to make a serious offer on a home, one of the decisions you’ll need to make is how much to put down for due diligence vs earnest money. Both checks represent your seriousness as a buyer and both could potentially be lost if you back out of the contract, depending upon the timing.
That’s why it’s important for you to understand the difference between a due diligence fee and earnest money when you are planning your house-buying journey. And in this rapid-pace market, your realtor can offer invaluable advice to help increase the likelihood of securing the home of your dreams with the least risk. It’s also worth noting you’ll need to write these checks as soon as the offer is accepted–so be prepared!
What Is Due Diligence?
Due diligence is a process that takes place during a designated time frame after your offer is accepted and before closing. That generally is 14 to 21 days, during which you can have inspections completed on the home to determine if any repairs are needed or if any conditions were misrepresented during the sales process. (You pay for these inspections.)
Inspections can range from a general home inspection to check the conditions of the roof, foundation, plumbing, etc., to radon testing, mold testing or other specific issues that could depend upon the age of the home or your location in North Carolina. If needed repairs are discovered during the inspection process, you’ll negotiate with the seller over what repairs to complete and how those repairs will be paid for. For instance, the homeowner may pay for the repairs, the homeowner’s insurance might cover some costs, the price of the house could be lowered, etc.
In North Carolina, you are required to pay a due diligence fee that goes directly to the homeowner when the sales contract is made. The fee historically has ranged from $500 to $2,000, (though currently $20,000-$50,000 range is often needed to be considered even for an average home sale).
If you back out of the contract during the due diligence time schedule, the homeowner keeps the fee, basically for the inconvenience of taking the house off the market during the time you were having due diligence completed. If you go through with the purchase, the due diligence fee becomes part of your payment on the house.
What Is Earnest Money?
Earnest money is part of the negotiating process to convince the homeowner you are a serious buyer. In a hot real estate market, the bidder offering the highest earnest money likely has the best chance of getting their bid accepted by the homeowner.
Earnest money often ranges from 1 percent to 3 percent of the offered price for the home. So if you’re buying a $200,000 home and want to show your earnestness with a 3 percent offer, you’d be putting up $6,000.
The good news is, the check you write for earnest money will be held in an escrow account by a third party, generally one of the real estate agencies involved. If you back out of the contract during the due diligence phase, you will receive your earnest money back. However, if you decide to back out of the contract after the due diligence period and before closing, you also will lose your earnest money and it will go to the homeowner. If you complete the purchase, the earnest money applies to your offered price.
Sometimes It’s Worth Canceling
When might it make sense to cancel, even if it means taking a financial hit? If a homeowner is unwilling to make major repairs, leaving you stuck with big bills just at the time you want to be enjoying your new home. Or if a home doesn’t appraise high enough, you might run into problems with your mortgage lender that make the hit worthwhile.
While it’s never a decision you’d make lightly, sometimes it is worth it to cancel a sales contract on your potential new home, if it means preventing further losses from a bad house or a bad deal. That’s why it’s helpful to use the due diligence period wisely, and minimize any potential losses.
One of our most valuable services is assisting our clients in navigating the due diligence and earnest money decisions. If you’d like a partner to help you find and secure your dream home, while enjoying the buying process more, please give us a call!