Earnest Money Deposits & Due Diligence Fees in Real Estate Contracts

October 2021
Island Real Estate Update

Not only is the real estate market constantly changing, but the practice of real estate itself regularly experiences modifications in the forms that we use and in the relative importance of various contractual features. A good illustration of this observation can be found in the ways in which earnest money deposits and due diligence fees are viewed by buyers, sellers, and real estate agents.

I think everyone is familiar with earnest money deposits, sometimes called “good faith money”. It is an amount of money that is deposited at the time of sale into a real estate trust account until the transaction either closes or is terminated. The specific amount of the earnest money deposit is negotiated by the buyer and the seller. If the sale closes, the earnest money deposit is credited toward the purchase price. If the contract is terminated, it is usually returned to the buyer. Almost all contracts contain an earnest money deposit.

In contrast, a due diligence fee is a negotiated amount paid by the buyer to the seller to compensate the seller for the buyer’s right to terminate the contract for any reason or for no reason at all during the due diligence period.  It is payable on the effective date of the contract and becomes the property of the seller. If the transaction closes, it becomes a credit to the buyer. If the buyer terminates the contract, the seller retains the due diligence fee. A due diligence fee may or may not be included in a contract depending upon the agreement between the buyer and the seller. While due diligence fees have been fairly common in markets on the mainland, it was only recently that we started to see them being used more frequently in contracts on Hatteras Island.

In my opinion, due diligence fees are becoming increasingly common as the selling prices of properties have increased. Think of it this way – if a contact only contains an earnest money deposit, regardless of the size of that deposit, the buyer will get their money back if they terminate the contract for any reason or for no reason during the due diligence period (usually about 30 to 45 days after the effective date of the contract). On the other hand, if the contract contains a due diligence fee, and the buyer terminates the contract, the seller will retain the due diligence fee. To simplify the issue, if a buyer only has an earnest money deposit in the contract, they really have nothing to lose if they terminate the contract during the due diligence period. In contrast, if there is a meaningful due diligence fee included in the contract, the buyer has that money at risk if they terminate the contract. Therefore, the due diligence fee becomes a tangible indicator of the buyer’s commitment to purchasing the property. You can see why a seller might want to have a due diligence fee in the contract for the sale of their property. Which buyer do you think is more committed to the purchase of a property – the buyer with no due diligence fee at risk or one that has agreed to a due diligence fee of perhaps $5,000 or more?

Your Outer Beaches sales brokers understand contract provisions and can help you to evaluate the nuances as they relate to your personal best interests. The Sales Team may be contacted toll-free by phone at 866.627.6627 or by e-mail at sales@outerbeaches.com. We look forward to hearing from you!

Tom Hranicka, Sales Department Manager

Tom Hranicka, Sales Department Manager
Associate Broker

ABR, CDPE, CRS, GREEN, GR

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