Understanding Due Diligence and Earnest Money in North Carolina Real Estate
Here is what you need to know about due diligence and earnest money in real estate!
When you go under contract on a home in North Carolina, you will encounter terms like Due Diligence and Earnest Money. It's important to note that real estate contracts and laws change depending on your state.
Whether you are a first-time home buyer or are buying again, you will want to know how due diligence and earnest money impact you as a buyer or seller in North Carolina.
If you're entering the North Carolina real estate market, understanding the unique aspects of our state's approach to due diligence and earnest money is essential.
Unlike many other states, North Carolina has a distinctive system that can significantly impact your home-buying experience.
At Raleigh Realty, we believe informed buyers make confident decisions, so we've created this comprehensive guide to help you navigate these critical components of the home-buying process.
If you or someone you know has started looking for a home, you have no doubt come across the terms earnest money and due diligence. Here, we take a closer look at what due diligence and earnest money fees are, their importance in the offer process, and what steps you can take to prepare to pay them financially.
It should be noted that only some states use due diligence fees in real estate transactions, so it is essential to consult with your real estate agent so they may educate you on the legal implications of a housing contract.
Here is what you need to know about due diligence and earnest money
1. Due Diligence: What Is it?
Due diligence money is a fee paid directly to the seller in a real estate transaction. It is immediately owed, though sometimes it is paid a few hours after the contract is executed. This is part of what happens when you go under contract on a home.
Though generally non-refundable, the due diligence period is a specified timeframe during which the buyer has the opportunity to:
- Conduct home inspections
- Review property disclosures
- Perform title searches
- Secure financing
- Complete appraisals
- Address any concerns about the property
This is not a set fee but rather one that you decide upon with guidance from your real estate agent based on your readily available funds. Typically, the amount ranges from three to five percent of the home's offer price. Although, competitive propeties command substantial due diligence fees.
Sometimes, you may hear someone refer to this fee as "good faith" money, as it is a fee that you are giving the buyer directly to let them know that you are serious about buying the property.
It can also be considered a down payment towards the home's purchase price, as the due diligence money will be credited back to the buyer at closing.
Due diligence fees are most frequently paid through a wire transfer or personal check. Your real estate agent will pick up the tab from you and deliver it to the listing agent, who will then pass it along to the seller.
2. Due Diligence Fees Are Guaranteed Money For The Seller
It is important to note that due diligence fees are non-refundable, assuming the seller follows through with their promises in the contract. Buyers will forfeit this money if they decide to terminate the agreement.
The due diligence fee gives the buyer the right to walk away from the transaction for any reason before the due diligence period expires.
Once given to the seller, the money is deposited and will not be returned. If a buyer refuses to pay the due diligence fee because they no longer want to buy the home, the seller can seek legal action against them to collect the funds.
If a seller cannot hold up their contract, the money can be refunded to the buyer, but this is highly uncommon. When this situation does occur, it is usually due to extenuating circumstances, such as the property being destroyed before closing or a title issue being revealed that cannot be resolved before closing.
3. Due Diligence Period
With the acceptance of your due diligence fee, you then enter into what is referred to as the due diligence period, where the house is officially taken off the market before closing.
The time agreed upon between the buyer and the seller typically ranges from 14 to 30 days but the length of the Due Diligence Period is entirely negotiable between the buyer and the seller.
During this time, a buyer needs to accomplish many things, such as home inspections, appraisals, securing financing, and title searches. Due diligence fees pay for the time it takes to complete these tasks. Let's take a closer look at each one of these processes.
Home Inspections
Why do real estate agents recommend getting home inspections during the due diligence period? This is so that you know precisely what issues must be fixed upon moving into your new home.
Following an inspection, you may decide not to proceed with closing on the house due to the number of things that need to be fixed. You certainly have the right to do this, but it will cost your due diligence fee. Again, it is non-refundable once a contract is formed between you and the seller.
Inspections are an expense that the buyer pays. If you have an inspector you are familiar with, you may choose to work with them. If you are still determining who to complete your home inspection with, your realtor can guide you through choosing a reliable inspector. You can be there during your inspection, but it won't be required. This is a task that your realtor can be current for on your behalf.
Home Appraisals
The biggest reason that an appraisal is performed during the due diligence period is to determine whether or not the home's contract price is appropriate, given the home's features, location, and overall condition.
An appraisal is an essential part of the home buying process for the buyer, as lenders will not lend money to you if the appraised value comes back lower than the loan amount.
As a buyer, you want the home's appraised value to be right at your offer price or higher so that you can continue with the closing process.
The home appraisal is an essential step towards closing; pay attention to its importance in securing finance whether you have written an offer or intend to make an offer soon.
Title Searches
What is a title search, and how does it work? Typically performed by a licensed real estate attorney, a title search is a search for documents on a specific property, namely, who has legal ownership of the home, so that we know exactly who needs to transfer the title of the house to you at closing.
A title search can also provide the following information:
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Deed Restrictions limit the reasons for which the property can be used, what types of construction the city allows on a property, the number of vehicles permitted at home, etc.
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Any existing easements on the property legally allow another party to use someone else's property. Examples include a utility company being allowed to use part of the land to run power lines.
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Liens on the property, such as unpaid debts.
Title searches are included in closing costs paid by the buyer.
4. Securing Funding During Due Diligence
It is essential to use the time bought for you during the due diligence period to consult with your lender to ensure that the period is enough for them to provide you with funding following the home appraisal. Depending on the financing you receive for your home, more time may be needed to secure that financing.
It is also a good idea to consult with your lender on whether to proceed with the transaction or terminate it. In addition to your due diligence and earnest money fees, you, the buyer, will always be responsible for closing costs.
Examples include the appraisal and inspection fees, any HOA fees associated with the home, property taxes, and insurance premiums due at closing. Your lender can give you an idea of the funds you need that are readily available at closing time.
5. Earnest Money
While the due diligence fee gets significant attention, earnest money remains an important component of North Carolina real estate transactions.
Earnest money is similar to due diligence in that it is another fund that you are paying the seller to show your commitment towards buying their home. It can also be considered "good faith" money that is applied to your purchase price at closing.
There are some critical differences between the two fees: earnest money is refundable if you withdraw from the contract during the due diligence period. Earnest money is not required in an offer to purchase, but when offered, it will usually fluctuate anywhere from one to two percent of the offer price for a home.
Earnest money is usually held within the trust account of the escrow agent, usually a licensed attorney, named in the contract until the settlement date. Much like due diligence, the earnest money is generally given as a wire transfer or personal check.
This money typically does not earn interest in the escrow account but can make it if both buyer and seller agree. It would be best to negotiate who earns that interest, and the details must be included in the purchase contract. This will require the use of an attorney to draw up the pieces.
6. Earnest Money Is Refundable, Sometimes
If you no longer wish to purchase the home before your due diligence period ends, you will receive a full refund of your earnest money.
If you withdraw your offer after the due diligence period has passed, this is the only time the earnest money will not be refunded to you. It's important to note the difference, as the due diligence period is a critical timeframe.
7. Earnest Money and Due Diligence in Today's Market
As stated above, only some states use due diligence fees. Still, if you are buying a home in North Carolina, the importance of due diligence has increased exponentially within the past few years.
In contrast, the importance of earnest money has decreased. This is because they offer higher amounts in due diligence to make an offer more competitive.
So why is due diligence more attractive to a seller than earnest money? Because that is guaranteed money for them. They more than likely will not back out of the sales contract, but even if the buyer does, they can sign the termination of the contract and put their home back on the market for the next buyer, all while still making a profit from due diligence.
Depending on what city and neighborhood you are considering moving to, there may be an exponential increase in the number of people looking to move there alongside you. You more than likely have heard that to make your offer more competitive than the offer from the person next to you. It is a good idea if you have those funds readily available. You will not lose the money if your offer is not accepted because no contract will have been executed.
If you do not have that extra money readily available, do not let that deter you from buying a home. Consult your real estate agent and discuss how much you can reasonably offer so you are spending only what you should.
Key Differences at a Glance:
| Due Diligence Fee | Earnest Money | |
| Paid to | Seller directly | Held in escrow |
| Refundable during due diligence | No | Yes |
| Redundable after due diligence | No | Only if seller defaults |
| Applied to purchase | Yes, at closing | Yes, at closing |
| Primary purpose | Compensation for taking property off market | Demonstrates commitement to purchase |
8. How To Prepare for Due Diligence and Earnest Money
What is the biggest way you can prepare for due diligence and earnest money fees? Look at your finances. See exactly how much money you have readily available, i.e., how much money is liquid.
Have a very open and honest conversation with your real estate agent about that amount, look at how much you are pre-approved for, and then have them advise you on an amount you will likely need to pay for a competitive offer. Remember, you will only lose these funds if you withdraw from a contract.
Due diligence and earnest money fees are down payments toward your dream home. Giving someone money upfront for a home may be intimidating, but the minute you receive your keys, it will all be worth it.
9. Common Mistakes to Avoid
- Underestimating Due Diligence Timing: Schedule inspections immediately after contract acceptance to allow time for repair negotiations.
- Neglecting to Understand Contractual Deadlines: Missing the due diligence deadline puts your earnest money at risk.
- Failing to Properly Allocate Funds: In competitive markets, some buyers allocate too much to earnest money and not enough to due diligence (or vice versa).
- Skipping Important Inspections: Even with a tight timeline, don't skip critical inspections like structural, pest, and radon testing.
- Not Reading the Fine Print: North Carolina's standard Offer to Purchase and Contract form contains specific language about due diligence and earnest money that requires careful review.
The North Carolina real estate market has seen significant evolution in how due diligence and earnest money are approached:
- Increased Seller Protections: The substantial increase in due diligence fees has provided sellers greater security when accepting offers.
- Buyer Strategy Shifts: Buyers now often conduct pre-offer inspections or "information-only" inspections to make informed due diligence fee decisions.
- Contract Form Updates: The standard NC Offer to Purchase and Contract form has been revised to better clarify the due diligence process and protect all parties.
Methodology
Data was sourced from NC Realtors and the North Carolina Real Estate Commission to determine what to know about due diligence and earnest money in real estate.
FAQs
Do you lose earnest money during due diligence?
No, you do not lose your earnest money during the due diligence period since this is the time for a buyer to conduct inspections of the home. If a buyer pulls out of the contract during this period, they usually get the earnest money back.
What is the earnest money rule in NC?
In North Carolina, it is required that any earnest money be deposited in a trust or escow account until closing.
What happens if a buyer backs out after due diligence?
If a buyer backs out after the due diligence period, the seller is entitled to keep the earnest money on top of the due diligence fee.
Due Diligence and Earnest Money - Final Thoughts
North Carolina's approach to due diligence and earnest money creates a unique balance of buyer flexibility and seller protection. Understanding these components is essential to successfully navigating the Raleigh real estate market.
Whether you're buying your first home or you're an experienced investor, having a knowledgeable Raleigh Realty agent by your side can make all the difference in protecting your interests while securing your dream property.
If you would like our help when buying or selling real estate in the Raleigh area, please reach out to us via the website or by call/text to our company number 919-249-8536.
