Due Diligence Money vs Earnest Money: Which is at Risk?
One of the most difficult things with North Carolina real estate transactions is our due diligence contract and the requirement that buyers not only put down earnest money but due diligence money as well. What is due diligence money and is it at risk?
The description (and videos) below explain this aspect of the North Carolina Offer to Purchase and Contract.
The North Carolina offer to purchase and contract is called a due diligence contract. What this means is that we have a due diligence period, and within this timeframe, a buyer can terminate our contract for any reason or no reason. It does not have to be because of the inspection or because of the loan. It's any reason or no reason.
When an offer in North Carolina is made, there's two important dates and two important payments that are made by the buyer: earnest money which is held in trust, this is part of your down payment; and due diligence money which is money that goes to the seller for the seller allowing you to put their house under contract and take the house off the market during the due diligence period.
The first important date in the contract is the due diligence date. The second date is the closing date. Regarding the due diligence date, this is the timeframe in which the buyer will do all of their investigations about the property, from home inspections, wood-destroying insect and radon inspections, the survey, the appraisal, and processing the buyer’s loan. Within this timeframe, the buyer can terminate the contract for any reason or no reason. Another house could come on the market that the buyer prefers, or the seller is not willing to repair items that are important to the buyer. The only requirement is that the termination must be on or before the due diligence date in the contract.
It is critical to understand that if the buyer terminates the contract on or before the due diligence date, they forfeit the due diligence money. It will stay with the seller. The earnest money will, however, come back to the buyer. If the buyer goes to closing on the property, the seller will credit the due diligence money back to the buyer. If by chance the buyer says they are going to buy and they go past the due diligence date and then they back out or terminate prior to closing; the buyer would lose not only the due diligence money but the earnest money too.
If the buyer terminates the contract on or before the due diligence date, the buyer loses their due diligence money. So, the money is at risk if the buyer terminates. If the buyer does not terminate, the due diligence money is not at risk, it comes back to the buyer at closing and is added to the earnest money which goes toward the buyers down payment.
Everything in our contracts are negotiable. Typically, we see due diligence periods at three weeks or less and closing dates about two weeks after the due diligence date. Closing dates can be further out but sellers want to see the shortest due diligence period possible because they don’t know if the buyer is proceeding until the due diligence date.
The next big question is how much due diligence money and how much earnest money should you put down? Everything is negotiable and it depends if the situation is competitive or not. It also depend on the price range of the house and how long it has been on the market.
Earnest money can be 1% of the purchase price or even less. Sellers care a whole lot more about due diligence money because this is what they get if the buyer backs out.
Due diligence money can be anywhere from $500 to $100,000 or more! If the situation is not competitive, you may be able to put down $2,000 or $5000 or $10,000. If you are in a multiple offer situation, you want to put down as much due diligence money as possible.
Here are multiple videos explaining due diligence in North Carolina.
Due Diligence Process in North CarolinaMore on Due DiligenceAt Real Estate Experts, we are your real estate consultants and we will advise you about every aspect of the contract and home buying process. We will listen and answer every question and set your expectations throughout the process.
Make sure to see
How we work with sellers,
how we work with buyers and our 119+
5-Star Google Reviews.