Understanding due diligence in a 2022 housing marking

When you’re buying a home, particularly in the current housing market, there are numerous considerations you need to make to ensure you make a great offer that gets accepted. You need a solid down payment and money for closing costs. You’ll also need extra up-front cash for earnest money and due diligence.

If you aren’t familiar with the concept of earnest money or due diligence, they can be confusing since they seem so similar. However, the two play very different roles in the purchase of a home. If you’re asking yourself what purpose due diligence serves, keep reading. Here are common things you’ll want to understand about due diligence before you make an offer.

Earnest money is paid when an offer is made on a home. This payment acts as a “good faith” deposit for the seller, showing you are serious about a purchase. When the offer is accepted, the house goes off the market for appraisal and inspection, and your earnest money will be held in escrow until closing. Then, it will be wrapped into closing costs or a down payment on your home when you close.

You will not lose earnest money if you decide not to purchase a home, as long as you follow the conditions you’ve set in your offer letter. Talk to your Realtor to ensure you understand what’s expected of you.

Due diligence is common, but it varies across states. A due diligence offer is an optional payment that will sweeten a deal. When you offer due diligence as part of your offer, you’ll enter into a period of time where inspections and appraisals are done before you enter into the final sale process. However, if you back out on the purchase of the home, the seller will keep those due diligence fees. It’s kept as compensation for the sum of time the house sat off the market.

When demand is high, as it currently is in the Raleigh-Durham area, due diligence is important for showing a seller you’re serious about your purchase. Due diligence can be used strategically to show a seller just how serious you are about your purchase. Typically, when an offer is agreed upon, the transaction moves into a due diligence period, which is when potential buyers can do necessary inspections to determine whether they want to move forward with the transaction.  

In a normal due diligence period, inspections and other processes begin, and you can request any necessary repairs be made before the purchase is finalized. 

The following typically occurs during the due diligence period:

Inspections – During home inspections, your inspector will look for any issues with the structure of the home, including the foundation and roof. They look for problems with mold, plumbing, HVAC and electrical systems, and any leaks that could cause issues. The North Carolina Real Estate Commission explains that buyers can request any number of repairs during the due diligence period. However, it doesn’t mean a seller has to make them. In the recent Triangle market, many buyers have purchased a home sight unseen, and getting an inspection to know what repairs they may have to make when the purchase is complete. Being aware of this fact can help you be prepared for the right outcome.

Appraisals – An appraisal is done by a professional real estate appraiser who reviews the size and overall condition of the home, location, any improvements that have been made, and more. Once they’ve made an assessment, the final appraisal is made to determine what the bank will fund for a mortgage. If a home is appraised at less than your offer, it’s important to know you’ll have to cover the additional cost of the home if you still want to go through with the purchase.

Title searches – A real estate attorney will begin searching for the paperwork needed to finalize deed transfer, including any liens, easements, or deed restrictions that may exist.

Think carefully about how you would like to use your due diligence money, and work closely with your Realtor to make a sound decision. As an example, if you were to offer a large sum of money for due diligence only to learn that a home has numerous issues and you back out of the purchase, the sellers will pocket the money instead of you having the additional cash to put into your down payment.

You pay the due diligence fee when an offer is accepted. Unless a breach of contract occurs, it’s a fee you won’t get back. That’s why it’s so important to ensure you’re serious about a purchase. You don’t want to lose that money, which will be credited back toward the purchase of your home when the sale goes through. You’ll want to talk carefully with your Realtor to ensure you’re making the right choices in the process.

North Carolina’s due diligence fees have grown in importance. Specifically, the Triangle market has tough competition when it comes to home shopping, so due diligence is highly important. In fact, average due diligence across the Triangle  has increased significantly Whereas, in other areas, it may still be 3 to 5 percent of your asking price. Don’t let these numbers stop you from purchasing a home, however.  

Protect your deposit by consulting with your Realtor, who knows the landscape of the Triangle market. Your agent will give you insights, such as the processes and contingencies, to ensure you’re making a sound offer that will protect your deposit. If you don’t currently have a Realtor, get in touch with any one of our award-winning agents to navigate the market with ease. The Jim Allen Group even has an in-house appraiser, title searcher, home measurer, and connections to all the resources you may need to help make selling and buying a home successful.

The Jim Allen Group provides access to information on this blog/website as a public service for educational purposes only. Although reasonable efforts have been made to ensure that all of the information made available is current, accurate, and complete…[read more]