Due diligence and earnest money are paid upfront by the buyer when they have found a property they like. Both payments demonstrate the buyer’s commitment to the transaction, but they have different purposes and implications.
Due diligence money is a payment given by the buyer to the seller to remove the property from listings while the buyer inspects it to verify it meets safety and other requirements. Earnest money is a good-faith payment often calculated as a percentage of the contract price.
While both payments appear to be similar, they are not. If you are a first-time homebuyer, you will probably find it puzzling to distinguish between these two, so let’s help you understand what each means.
What is Due Diligence Money?
Purpose
Due diligence money is paid directly to the seller by the buyer to compensate the seller for taking the property off the market while the buyer conducts their investigations (inspections, appraisals, etc.). The buyer could be attracting new offers if the property was still listed, so taking it off the market involves a potential loss, which is covered by the due diligence money.
In North Carolina real estate transactions, this fee and earnest money are essential parts of the home-buying process. The due diligence process lets buyers inspect the property carefully before making an offer to purchase. If happy, the buyer may go under contract, showing they are serious about buying. Working closely with a North Carolina real estate attorney throughout the process is important to obtain legal advice and ensure a successful transaction.
Consult our blog for more detailed information on the due diligence process in North Carolina real estate transactions. We provide content that guides buyers and sellers toward successful real estate transactions.
Non-refundable
Typically, due diligence money is considered non-refundable. If the buyer decides not to proceed with the purchase for any reason, the seller keeps this money as compensation for the time the property was off the market. This part of the due diligence process highlights the importance of careful consideration and talking with a North Carolina real estate attorney before making an offer to purchase.
Flexibility
The payment gives the buyer the right, but not the obligation, to purchase the property after completing their due diligence. It lets the buyer terminate the contract within the due diligence time period without legal consequences. This flexibility is important for buyers in North Carolina real estate transactions.
Amount
It’s common for the due diligence cost to be around $500 to $2,000, depending on the agreement between the buyer and seller. In competitive real estate markets, sellers appreciate higher due diligence fees; the highest fee could be the deciding factor if multiple buyers are interested. This fee and earnest money show the buyer’s commitment and can influence the seller’s decision in a competitive market.
What is Earnest Money?
Purpose
Earnest money is a deposit the buyer makes to the seller as a sign of good faith. It establishes the buyer’s intention to complete the purchase. Earnest money is usually held by an escrow agent and credited toward the down payment or closing costs at closing. This deposit safeguards the seller’s interests and indicates the buyer’s serious commitment to the transaction.
Refundable
Earnest money can be refundable if certain conditions outlined in the purchase agreement are not met or if the buyer backs out of the deal during a contingency period (e.g., due to failed inspection or inability to secure financing).
Remember that the earnest money deposit can be lost completely if the buyer changes their mind about buying the house after the due diligence period or if the transaction is not completed due to reasons outside those listed for earnest money reimbursement in the contract.
Commitment
Earnest money serves as a financial pledge towards the purchase and demonstrates the buyer’s seriousness and commitment to completing the transaction. This deposit reassures the seller of the buyer’s intention to proceed with the purchase agreement.
Amount
The amount of the earnest money is typically a percentage of the purchase price, often ranging from 1% to 3%. In competitive markets, this percentage can be higher. The earnest money is held in an escrow account until the closing or termination of the contract. Then it is either applied towards the purchase price or refunded to the buyer based on the terms outlined in the contract agreement. This earnest money deposit shows the buyer’s commitment and helps secure the transaction.
What’s the Difference Between Due Diligence and Earnest Money?
Purpose
Both the due diligence fee and earnest money are paid in good faith by the buyer. These fees signify the buyer’s genuine interest and intention to purchase the property, indicating a strong level of commitment in the transaction process. This financial investment highlights the buyer’s seriousness and dedication to acquiring the property.
Refundability
The due diligence fee is generally non-refundable. If the buyer decides not to proceed with the purchase during the due diligence period, the seller keeps this money.
Conversely, the earnest money is refundable under certain conditions, such as failing to meet contingencies specified in the contract (like financing, inspections, or appraisal issues) or if the seller reneges on the contract.
If the buyer doesn’t proceed with the purchase after the due diligence period, then the earnest money is not refundable.
Payment
Due diligence money goes directly to the seller and is paid upon the purchase agreement.
Earnest money is held in an escrow acchouseount until the closing or termination of the contract, at which point it’s applied to the purchase price or refunded to the buyer based on contract terms.
Risk to buyer
The due diligence fee represents the buyer’s immediate financial risk in the transaction, as it’s not recoverable if the buyer withdraws from the deal during the due diligence period.
Earnest money is less immediately risky than due diligence money, as there are usually specific conditions under which it can be refunded to the buyer.
