Earnest money and due diligence fees can be a confusing subject for a new home buyer, so let’s take a quick dive into what they are and how they work, the goal of providing clarity to a first-time home buyer in North Carolina.
Earnest Money
We’ll start with earnest money. When you decide that you would like to make an offer on a property, you will present an offer to purchase. This offer will designate the terms that you are offering the seller for the purchase of their home. To demonstrate that you intend to complete the transaction in earnest or with good faith, it is customary to include an earnest money deposit (Team Content). This amount varies from case to case, usually dictated by the competitiveness of the market you are in. The deposit is held in an escrow account and it is fully refundable if you decide not to buy the property, as long as this termination is done within the due diligence period. If you do close on the property, the earnest money is applied to the purchase price.
In short, earnest money is essentially used to communicate to the seller that “you are willing to put your money where your mouth is” (Weintraub).
Due Diligence Money
Due diligence fee is essentially a way to compensate the seller for taking their house off of the market for your due diligence period, so you can do your due diligence without the pressure of other buyers. During your due diligence period, you will be securing your financing (if necessary) and completing your inspections to ensure that you are comfortable with the property. By requiring a due diligence fee, a seller is making sure that they will be at least receive some funds if the deal does not make it to closing. This keeps people from making offers and signing contracts that they are not serious about completing. If you decide to break the contract during your due diligence period, you will not be refunded that fee, but you can break the contract for any or no reason at all.
The amount you offer for due diligence also widely varies and is something you’ll want to discuss with your agent. If it is a property you feel good about making it to closing and it is a competitive situation, you may consider a higher due diligence fee than on a property that you anticipate having issues. This deposit will be given directly to the seller. The only way that a buyer can be refunded their due diligence fee is if the seller “materially breaches the contract,” which is rare according to the North Carolina Real Estate Commission (Due Diligence Fees).
In short, your due diligence fee should be an amount you’re willing to risk while inspecting the property on which you’re making an offer and your earnest money will vary depending on how strongly you want to impress the seller with the seriousness of your offer.
Either way, do what makes you feel comfortable!
References—
“Due Diligence Fees: When Are They Refunded?” NCREC
Bulletins, 3 Oct. 2017,
bulletins.ncrec.gov/due-diligence-fees-when-are-they-refunded/.
Team, Content. “Earnest Money – Definition, Examples, Cases, Processes.” Legal Dictionary, 13 Aug. 2015, https://legaldictionary.net/earnest-money/.
Weintraub, Elizabeth. “Your Quick Guide to an Earnest Money Deposit.” The Balance, The Balance, 9 July 2019, https://www.thebalance.com/protect-your-earnest-money-deposit-1798341.
