Five Things about Due Diligence Fees in North Carolina

If you are like me, you seek out the details independently before you sign anything. As a Florida real estate broker for many years, I found it quite interesting the concept of due diligence fees in North Carolina when purchasing a home. Understanding due diligence fees in concept is not enough to navigate the home buying process or mitigate the risks of financial loss. As a buyer, you absolutely need to understand what you are agreeing to in the contract. Let’s talk about it.

Specific to North and South Carolina is the concept of paying a seller a due diligence fee. I would like to make this clear: Due diligence fees are not a requirement to enter into a contract. As a prospective buyer, it’s up to you to decide whether the payment of a due diligence fee will increase the chances of a contract being accepted. In the Triangle market, I would say that most sellers expect a due diligence fee in order to compensate him/her for taking their property off the market while the buyer conducts his inspection. Here’s the risk to the seller: I take my property off the market and then the buyer decides to not purchase, now I have to explain to future prospective buyers why the deal did not go through. The seller wants to be compensated for that risk.

What are due diligence fees?

So let’s talk about what exactly due diligence fees are. As a realtor, my local realtor association provides me with a standard contract for titled “Offer to Purchase and Contract”, often referred to as the “2T”. Within this 2T contract form, both due diligence and due diligence fees are defined. I like to see things in black and white where there will be zero misinterpretations.  As a result, I will quote the 2T definitions right here for you as well as the sections of the contract that you can locate these items:

            In 1(h) of the 2T contract, due diligence is described as the “Buyer’s opportunity to investigate the Property and the transaction contemplated by this Contract, including but not necessarily limited to the matters described in Paragraph 4 below, to decide whether the Buyer, in Buyer’s sole discretion, will proceed with or terminate the transaction.”

            In 1(i), the due diligence fee is described as “a negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer’s right to terminate the Contract for any reason or no reason during the Due Diligence Period. It shall be the property of Seller upon the Effective Date and shall be a credit to Buyer at Closing. The Due Diligence Fee shall be non-refundable except in the event of a material breach of this Contract by Seller, or if this Contract is terminated under Paragraph 23(b) or as otherwise provided in any addendum hereto…”

The North Carolina Real Estate Commission (NCREC) has stated in their February 2022 eBulletin titled “But the Seller Breached! When Should Due Diligence Fees be Refunded?” that buyers and sellers are “not required by law or by the Commission to either use the form provided to brokers by their trade association or to include a due diligence fee as part of their contract”. Here, the NCREC is referring to the 2T contract that I mentioned previously which is the contract that realtors use to submit offers (unless of course a buyer or seller decides to use their own attorney to draft the contract). It’s imperative that all prospective buyers and sellers understand that they are free to have their attorney draft the contract for purchase or sale. When you take a look at the 17 or so pages of the 2T contract, it can be quite intimidating if as a buyer or seller, the first time you are seeing it is when a realtor presents it to you upon either receipt of an offer or submission of one. Not a good position to be in.

Here are the 5 scary things

So, what makes the due diligence fee scary? It’s all in the 2T contract which in my personal experience, most realtors do not take the time to highlight the risks of your hard-earned due diligence fees or earnest money deposit. Here are five (5) things you need to know about due diligence fees:

1. The decision to offer a due diligence fee is completely up to the buyer. It’s an amount that may likely be negotiated by the buyer and seller. You can also decide to pay $0.

   
   

2. If you decide to pay a due diligence fee to the seller, you will need to assess how much you should pay. There is no set amount or percentage to offer. However, my advice would be to consider things like how many days has the property been on the market? Is it a multiple offer situation? Is the property in a sought-after area or neighborhood? How often do these homes come on the market? I have experience with sellers accepting less than 1% of the list price as a due diligence fee.

   
   

3. The due diligence fee is applied towards your purchase at closing…if you get to closing! Why do I say that? There are so many moving parts to a real estate transaction and no one knows if it will go smoothly. One thing we do know, is that once the due diligence is paid to the seller, and you go through the due diligence process, and you decide you do not want to purchase the home, you will not recover the due diligence fee paid unless there is a material seller breach. Ouch!

   
   

4. The due diligence fee is made payable to the seller and is to be delivered on the contract’s effective date. What’s your effective date? It’s the date that the last party to the contract signed and said contract has been communicated/delivered to the other parties. However, most contracts define

   what constitutes an effective date. Specifically, in the 2T, the effective date is defined in section1(g).

   
   

5. Have cash money!!! Do you have liquid funds available to pay the due diligence fee? This is important because if you are unable to pay your due diligence (DD) fee on the effective date then there will be consequences as per the 2T. As per the 2T, if the payment is not received or dishonored for any reason, you will then have one (1) banking day after written notice from the seller to deliver the DD fee to the seller. If the DD fee is still not paid, then the seller has the right to terminate the contract upon written notice to the buyer. And it gets worse. The seller will then be entitled to recover not only the DD fee from you but also any earnest money deposits that you either made or promised to make as per the contract. That’s a nightmare for a buyer.

My advice to any prospective buyer thinking of buying a property in NC is to either ask a realtor to see a copy of the Offer to Purchase and Contract (2T) or contact a local NC real estate attorney about how due diligence fees work. Arm yourself with the knowledge and do not let the first time you write an offer also be the first time you are seeing the contract.

If you are interested in receiving a copy of the 2T, please send me an email at CJ@clairesells.com.