You can learn a lot from social media, but you can also be wildly misinformed.
I was shocked to read a ton of bad information on a recent community post about real estate in the Wilmington market. So much so, I wanted to write this to separate fact from fiction.
The post discussed Due Diligence in North Carolina and the writer was lamenting the need to pay this upfront fee when purchasing real estate. We do hear this a lot and it’s one thing we spend a considerable amount of time discussing with our clients here at Just For Buyers Realty.
WHAT ARE DUE DILIGENCE AND EARNEST MONEY IN NC?
Let’s start with explaining Due Diligence and Earnest Money – two common deposits made when presenting an offer for property in North Carolina. Due Diligence is what some call the buyer’s “skin in the game.” This deposit is given to the seller with a purchase offer as an incentive to take their home off the market for a period (usually 2-3 weeks), while the potential buyer performs inspections and decides whether to proceed with the sale. In most cases, these deposits are non-refundable EVEN IF the buyer terminates the offer. In a standard market, Due Diligence would run about .5% of the sale price. So, for every $100,000 of the price, you would pay $500 to the seller.
Earnest Money is considered the secondary deposit in North Carolina. If a buyer terminates their offer within the Due Diligence period, the Earnest Money is refundable. Once the period ends however, Earnest Money becomes non-refundable in most cases. It basically serves as liquidated damages should the deal fall apart on the buyer’s end late in the game. In a standard market, Earnest Money is about 1% of a sales price ($1,000 for every $100,000 spent.)
IT CAN GET CONFUSING
While reading the comment section, I saw several wild claims that show me these two deposits can be confusing to shoppers. Here are just a handful of the misnomers:
CLAIM: DUE DILIGENCE MONEY PAYS FOR THE INSPECTIONS
This is NOT TRUE. Earnest Money AND Due Diligence deposits are both credited to the final price as initial payments to the seller. The money doesn’t pay for your inspections or repairs.
CLAIM: I HAVE TO OFFER DUE DILIGENCE.
Not necessarily. These deposits are all negotiable. However, the risk you run there is that your offer might not be as attractive as others in a multiple offer situation.
In the craziness of the last couple years, Due Diligence was the popular kid in class. Listing agents would frequently tell us their seller clients paid particular attention to the Due Diligence part of the offers. Earnest Money was not necessarily a decisive factor for many sellers. That led to several offers with DD in the 5 figures.
CLAIM: SELLERS AND SELLER AGENTS MUST DISCLOSE PROBLEMS WITH THE HOME
The answer here for North Carolina is no and yes. Sellers don’t, but seller agents do have to disclose what they discover.
North Carolina is a “Buyer Beware” state, which means that sellers are NOT obligated to reveal any problems with their home. Sellers must fill out a Residential Property and Owners Association Disclosure Statement to list their home, BUT they can put “no representation” down as an answer. That means they aren’t confirming nor denying a particular issue. They may also not know the answer, so to be safe from making a misstatement, they might check this box as well.
The listing agent IS required to investigate and must reveal any material facts they find when putting a home on the market.
However, things sometimes go undiscovered until the home inspection. Say your inspector finds a costly problem and the seller does not want to repair it or offer a credit. As a buyer, the ball is in your court to decide whether to forfeit your Due Diligence and walk away OR proceed and fix the problem on your own. Think back to those 5-figure DD offers. That’s a lot of money to walk away from when making perhaps the biggest purchase of your life.
We should point out that once that problem is discovered, it becomes a material fact. So, if you cancel the contract, the listing agent and seller must reveal this defect to the next potential buyers. While that’s little consolation to the first buyer, it could give pause to the seller to deal with the problem with you instead of waiting to explain it to the next customer.
CLAIM: I’LL PAY DUE DILIGENCE BUT ONLY AFTER INSPECTIONS.
It is possible. You can make an offer with a contingency option, stating something to the extent that the Due Diligence deposit is refundable should a home inspection uncover X amount of dollars worth of repairs. Get legal advice on this one. Real estate agents are not allowed to draft addendums in North Carolina, but an attorney could fashion some language to protect the deposit. Again though – keep in mind – this restriction could make your offer less attractive if there is a multiple offer situation.
CLAIM: SOME PARTS OF NORTH CAROLINA DON’T HAVE THE DUE DILIGENCE DEPOSIT
Not true. Due Diligence is an option all over the state of North Carolina. There may be some places of the state where fewer people offer Due Diligence and are still able to acquire property, but this type of deposit is considered a general standard across North Carolina. Again, it’s up to you on whether to offer it.
There are other ways to make an attractive offer package to a seller without a ridiculous Due Diligence component. Share your concerns with your REALTOR and the two of you can craft a winning bid that doesn’t put you behind the eight ball to start.
We strategize all the time. We’d love to consult with you on your needs. You can start that conversation by contacting Just For Buyers Realty at (910) 202-4813.