If you’ve been even the least bit tuned in to the current real estate market, then you have probably heard of Due Diligence. Are you hearing horror stories from friends, family and neighbors who have attempted to buy lately, only to be outbid by sky high Due Diligence Fees presented with competing offers? It is certainly happening these days, and we at Sawyer Realty are here to guide you in understanding what Due Diligence is, how it is applied to your purchase and, most importantly, when to maximize the amount you’re willing to offer.
What is Due Diligence?
Due Diligence can be broken down into 2 components – the Time Period during which you as the buyer perform inspections on the property, and the Fee that you as the buyer pay directly to the seller to take the home off the market. The Due Diligence period begins at contract acceptance and runs for a given period of time that is agreed upon by both buyer and seller. During the Due Diligence period, the buyer can walk away from the transaction for any reason and their Earnest Money Deposit will be returned. Note that the Due Diligence Fee will remain with the seller as a form of liquidated damages for the loss of the sale, should the buyer choose to walk away at ANY time. So, if you walk away, the seller keeps your Due Diligence Fee.
- For a more competitive offer, the buyer will present a shorter Due Diligence time period, such as 14 days, and a higher Due Diligence Fee.
- For a less competitive offer, the buyer may present a longer period of time, such as 30 days, and a lower Due Diligence Fee.
Due Diligence Expiration
Per the terms of the contract, the Due Diligence Period will expire at 5:00pm on a determined date. Ideally, you as the buyer will have had all inspections performed by that date, and agreed upon any and all seller-paid repairs. In a seller’s market, the seller is not likely to perform any repairs. North Carolina is essentially an “As-Is” state wherein the seller is not required to perform any repairs, but it is customary to attempt the negotiation of some repairs after the home inspection report is completed and reviewed. We have seen transactions lately where the buyer essentially opts out of the Due Diligence period altogether. For example, the Due Diligence period will be set to expire at 5:00pm on the day the offer is submitted. This makes for a HIGHLY competitive offer, but is extremely risky for you as the buyer, as you are waiving your right to have your Earnest Money Deposit returned, should you need to walk away from the deal. Note that you are still entitled to perform your Due Diligence inspections, BUT you are not going to get your Earnest Money returned if the deal falls through.
Do I Get It Back?
The good news is that your Due Diligence Fee and your Earnest Money Deposit are credited back to you as the buyer, assuming you make it to the closing table. We have shared that the Due Diligence Fee is kept by the seller as liquidated damages if the deal falls through on the buyer’s end. However, it is debited from the seller and credited to the buyer on the closing disclosure in the end as long as closing takes place. For example, if you offer $5,000 for Due Diligence and $2,000 for Earnest Money, you as the buyer will see itemized credits in both of those amounts on the closing paperwork. That $7,000 can then be applied to your cash needed to close and you will essentially “get it back” in the end.
How Do I Pay It?
Upon offer acceptance, you will write 2 checks. The Earnest Money Deposit check will be written to the law firm (or possibly to the real estate firm that listed the property) where it will be cashed and held in trust until closing. The Due Diligence Fee check will be written directly to the seller who is free to cash it immediately. Again, if you make it to the closing table, both amounts will be credited back to you at that time.
Offer Structure and Risk
|Least Competitive||Moderately Competitive||Highly Competitive|
|Due Diligence Period||30 days||15 days||0 days|
|Due Diligence Fee||low||moderate||high|
|Earnest Money Deposit||high||moderate||low|
How Much Should I Offer?
So, how do you know how much to offer? Take a look at several factors…
- How long has the property been on the market? If it is relatively new to the market, you’ll want to be more competitive whereas if it has been sitting for some time, you can probably go in with less risky terms.
- How are the rest of your offer terms? Are you presenting a cash offer, able to close in 30 days or less, asking for nothing else in terms of appliances and closing costs? Then you may be able to go in with less competitive Due Diligence. If your other terms are not as impressive as those above, include the use of a lender, have additional property to sell, need additional time to close, and are asking for seller-paid closing costs and appliances, you will want to go high in terms of Due Diligence.
- How badly do you want the property? Can you risk losing it to a more competitive offer? Is it THE ONE? When you know, you know.
Sawyer Realty Can Help
Obviously this is a concept with a lot of moving parts. We at Sawyer Realty are here to guide you through the home buying (and selling) process. We have an abundance of experience in negotiating offers and lately Due Diligence has been the star component of nearly every deal. Reach out to us today for a more personal approach to real estate. We would love to help you buy your dream home.
For more information on Due Diligence go to the North Carolina Real Estate Commission at: https://www.ncrec.gov/Brochures/QADueDiligence.pdf