What is the Difference Between Due Diligence Fee & Earnest Money in NC?
In North Carolina, due diligence money and earnest money are both types of deposits made by a buyer in a real estate transaction, but they serve different purposes and have different legal implications.
Earnest money, also known as a good faith deposit, is a sum of money paid by the buyer to the seller to show their commitment to purchasing the property. Earnest money is typically held by a third party, such as a real estate agent or attorney, in an escrow account until the closing of the transaction. If the buyer fails to close the transaction for any reason, the seller may be entitled to keep the earnest money as compensation for the time and effort expended in negotiating the transaction.
On the other hand, due diligence money is a sum of money paid by the buyer to the seller at the beginning of the transaction, to compensate the seller for taking the property off the market while the buyer conducts their due diligence investigation. Due diligence is the process of conducting inspections, reviewing documents, and otherwise investigating the property to ensure it meets the buyer's needs and expectations. Unlike earnest money, due diligence money is typically non-refundable, even if the buyer ultimately decides not to purchase the property.
In summary, while both earnest money and due diligence money are deposits made by the buyer in a real estate transaction, they serve different purposes and have different legal implications in North Carolina. Earnest money is a good faith deposit to show the buyer's commitment to purchasing the property and may be forfeited if the buyer fails to close the transaction. Due diligence money compensates the seller for taking the property off the market while the buyer conducts their due diligence investigation and is typically non-refundable.
In general, there is no definite amount set for due diligence or earnest money. The amount of earnest money paid could be a percentage of the purchase price but both the due diligence fee and earnest money deposit will be decided between the buyer and seller and written into the contract.
Think of it this way— the due diligence fee is like an engagement ring. You bought it as a gift for the girl you want to marry. And things are getting real— you’ll find out a ton about this woman in the engagement. Now, If You break the engagement, (because she’s nuts or you find someone else), she keeps the ring… no matter what— just ask Judge Judy. DDF is written directly to the seller, communicates your commitment to the contract, and if you walk away the seller keeps it.
The earnest money deposit is like a deposit to the travel agent for the honeymoon. It lines up with your plan to get married and is held by the travel company (a third party). However, if you cancel the engagement early enough, you can get your honeymoon deposit back. But if you cancel at the last minute, you don’t get that deposit back.
The good news is that if you follow through with the wedding— the ring and the honeymoon make a pretty sweet start toward the marriage.
It's important to understand the terms and conditions of these deposits when entering into a real estate transaction in North Carolina, as they can affect the financial outcome of the sale. Your real estate agent or attorney can help you navigate these deposits and ensure that you understand your rights and obligations.
