Due Diligence Contract Explained …
Beginning January 2011, The North Carolina Association of Realtors (NCAR) revamped the Contract Forms that we use in our Business in North Carolina. Most notably are the changes in the Offer To Purchase and Contract Form – specific to the timelines for Inspections and Loan Financing Commitment.
In Prior Years there was actually a timeline for the “Home Inspection” with specific Remedies to the Buyer and Seller regarding a Buyer’s request for any repairs, and was typically accomplished within the first 14 days from contract date. The “Loan Commitment” time period was typically a certain Number of days from the date of contract – during which the Buyer had to obtain a Firm Loan Commitment, and this was typically 30-40 days from contract date.
The New Forms, effective January 2011, basically eliminates individual timelines for the accomplishment of individual tasks and lumps any and all tasks under what is called a … “Due Diligence Period”.
This “Due Diligence” Period is a time period, usually a certain number of Days from the date of Contract (30 days to 45 days) during which the Buyer has the opportunity to have any (or, no) inspections completed. This is also the time period in which the Buyer will obtain any loan commitment if the Buyer intends to obtain Financing.
There is still an Earnest Money Deposit – that has not changed. The Earnest Money check is submitted with the purchase offer and is always maintained in a trust account to the credit of the Purchaser at Closing – unless otherwise negotiated between parties in the event of a contract default on the part of the buyer – which is rare.
The Due Diligence period language plainly states that the “Buyer can Terminate the Purchase Contract for any or no reason up and until 5pm on the date the Due Diligence period ends”. This is our North Carolina Offer To Purchase and Contract Form Standard language.
The new Form also has what is called the Due Diligence Fee. This is separate check from the earnest money deposit check. The Due Diligence Fee check is made payable directly to the seller and at whatever point there is a written signed contract, the “due diligence fee check” is given to the seller and the seller may cash the check immediately and will keep these funds.
If a Buyer closes on their purchase then the due diligence fee (and, the earnest money deposit check amount) are credited against the purchase price for the benefit of the buyer. If, however, the Buyer opts to cancel the contract during the Due Diligence period (which is completely within their right – for any reason or no reason), then the Buyer receives the Earnest Money back … “However, the Seller keeps the Due Diligence fee”, if there is one with the transaction. In about half of transactions, there is NO due diligence fee.
The purpose of the Due Diligence fee is that it is a nominal compensation to a seller for their having taken their property off the market, while a buyer has an opportunity to make all inspections and obtain any loan commitment, while the buyer retains the right to cancel the contract during the due diligence time period.
To date, I am seeing $0 Due Diligence Fee with Short Sale property purchase contracts.
I am seeing due diligence fee monies being a part of about 50% of transactions in our area. That means that half of the transactions have zero due diligence fee, and the remaining half have some nominal amount typically in the $300 to $500 range – including Bank Owned Foreclosure sales.
The Earnest Money Deposit amounts also vary based on purchase price. There is no custom or rule of thumb in our market, however, generally the stronger the Earnest Money the stronger the Overall Purchase Contract will appear to any Seller.
Call or Email with any questions …
John S. Leatherwood
252-202-3834 Cell Direct