In North Carolina, when a buyer makes an offer to buy a home, there are two fees that are typically included: due diligence and earnest money. Due diligence is uncommon in many real estate markets, which means buyers new to North Carolina may be unfamiliar with the distinction. Due diligence is an important occurrence in what are known as “buyer beware” states because it allows the potential purchaser to examine the property prior to closing.
The due diligence fee is an amount paid directly to the seller when an offer is accepted. This amount is designated in the contract and is non-refundable unless there is a breach of contract by the seller. In exchange for the fee, the seller takes the home off the market and the buyer secures the right to inspect the property. This typically includes actions such as performing inspections, surveying the property, and ordering an appraisal. Additionally, the due diligence fee gives the buyer the right to terminate the contract at any time during the due diligence period, for any or no reason. At closing, the fee is applied as a credit to the buyer and a reduction to seller proceeds.
The earnest money deposit (or ‘EMD’) differs from the due diligence fee in a few important ways. First, EMD is held in escrow by the designated escrow agent as opposed to being paid directly to the seller. This is because the EMD is refundable if the buyer terminates the contract during the due diligence period. However, if there is a breach of contract by the buyer, the EMD can be released to the seller.
Thus, the key and important distinction between a due diligence fee and earnest money deposit arises if the contract is cancelled. A due diligence deposit is forfeited to the seller unless the seller breached the contract, while earnest money is often refundable. Although similar in purpose and application, it is important that buyers, especially those new to the North Carolina market, understand the distinction and potential implications before making an offer.
Revolution Law Group is located in Greensboro, NC, and serves individuals and small businesses throughout the Triad and surrounding areas. To contact us please visit Revolution.law or call 336-333-7907.
The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.