Demystifying real estate: Understanding due diligence and earnest money

If you’ve bought or sold a home in the past, you’ve likely heard the terms “due diligence” and “earnest money” come up as part of the process. Due diligence and earnest money are two important terms you need to understand. In fact, both play a significant role in today’s real estate transactions. Therefore, understanding how they work can save you from confusion, as well as potential costly missteps.

Here’s what you need to know as you look to buy or sell.

Due diligence money is a fee the buyer pays directly to the seller when the Offer to Purchase is signed. It can be helpful to think of it as a “thank you” for taking the home off the market while the buyer does their homework on things like inspections, appraisals, and securing financing. The buyer and seller outline a clear period of time in the offer to investigate the property and the transaction.

The North Carolina Real Estate Commission added due diligence to the NC Standard Offer to Purchase and Contract Form in 2011 to help combat the effects of the 2008 market crash. The good news is that due diligence gives time to the buyer to investigate the property as the seller removes the home from the market. The fee is paid to the seller and not held in escrow.

The cost of due diligence typically runs between $500 to $2000, but it may vary depending upon the market. For example, during the COVID-19 pandemic, due diligence costs were at their highest due to market demand. Talk to a trusted real estate agent to determine what the right due diligence money might be in today’s market.

Here’s what is key for understanding due diligence: if the buyer completes the purchase, due diligence money is credited back at closing. But if the buyer walks away, it’s non-refundable in most situations. While a buyer can ask repairs be made, it’s not required for the seller to make them. That’s why you’ll want to make sure you’re working closely with your agent to ensure you’re making wise choices. While some issues may be harder to see until you enter into the due diligence period, the right agent will provide expert advice that can protect your interests.

The big difference between due diligence and earnest money is that earnest money is a separate deposit held in an escrow account by the closing attorney. This deposit also shows the buyer is serious about purchasing the home, but the seller doesn’t receive this payment.

The good thing about earnest money is that it’s refundable if the buyer terminates during the due diligence period. And, like due diligence money, earnest money is credited back to the buyer at closing. Buyers typically pay between 1 and 2 percent of the price of the home for earnest money.

Due diligence and earnest money are important for both buyers and seller. For buyers, these funds represent your commitment to the purchase. You’ll want to offer enough to show you’re serious about buying the home. That’s especially true in a competitive market like the Triangle. However, don’t make it more than you’re willing to lose if the deal falls through.

For sellers, both due diligence and earnest money protect your time and investment. If a buyer chooses to walk away after you’ve pulled your home off the market for weeks, these funds can compensate you for the inconvenience. In either case, a trusted real estate agent will have insight into what an acceptable offer may be.

There are a few things to be aware of before you go into a contract with either a buyer or seller. Here’s what to think about:

Buying or selling a home is a big deal, as is the money that’s needed during the process. Understanding how due diligence and earnest money work will give you a major edge in the Triangle market. These two funds not only help seal the deal. They will also help protect everyone involved.