What is Due Diligence and Earnest Money?
Perhaps the trickiest part of buying a home is understanding the terms in real estate. While the under contract process differs in every state, in North Carolina, we have Due Diligence. See the picture below to understand the timeline of purchasing and what happens at each stage.
Due Diligence refers to the 2-3 week period starting when you go under contract on the home. There is a Due Diligence Fee involved that is given to the seller to take the home off the market while you do your inspections, appraisal, negotiate any needed repairs, and overall feel comfortable about the home. You can walk away for any reason during this Due Diligence Period and only lose your Due Diligence Funds. If you go through with the purchase and close on the home, you get the Due Diligence Funds credited back to you at closing.
For cash closings, the timeline is often shorted to a couple of weeks total since you aren’t waiting for an appraisal, so you may only have a week of Due Diligence.
The Due Diligence fee varies depending on the market and the amount of competition on the listing. In the current 2023 market, I often see DD fees between 2-3% of the purchase price.
Earnest Money refers to a second check you write once you go under contract. This part of the process is usually for the lender, as they finish up the loan and arrange everything with the closing attorney. As the buyer, this money essentially shows you have skin in the game, as you have done all of your inspections and are just waiting for the closing date. This check is held by the attorney until closing. Earnest Money only affects you if you choose to walk away from the house after the Due Diligence Period has ended. It rarely comes into play, since you should be very comfortable with the home at the end of the Due Diligence Period. This is also credited back to you at closing.
The Earnest Money fee varies depending on the market and the amount of competition on the listing. In the current 2023 market, I often see EM fees between 2-3% of the purchase price.
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