What is Due Diligence?
If you haven’t bought or sold a resale home in NC since before 2011, you may not have heard of Due Diligence (this doesn’t apply to new construction). This is a process in which a buyer will give a non-refundable fee directly to the seller in order to have time to inspect, appraise and do their “due diligence” in determining if they will close on the home. The amount of the fee is completely negotiable and is in ADDITION to the earnest money deposit. A check is made directly to the seller at time of contract for the due diligence fee, which the seller deposits upon receipt. The earnest money deposit is still held by the escrow agent as it was before (typically the real estate firm representing the buyer, or closing attorney). During the inspection period (or Due Diligence Period), the buyer can cancel for any or no reason at all. If the buyer cancels before the Due Diligence Period ends, they are entitled to get their earnest money deposit back, but not the due diligence fee. After the Due Diligence Period ends, the buyer would also forfeit their earnest money if they cancel the contract. If the buyer closes, they get a credit for both the due diligence fee and earnest money deposit on the settlement statement.
Due diligence replaces the repair contingency of the past. With the old repair contingency, if the dollar amount of repairs exceeded a pre-determined amount, the buyer could cancel the contract.
How long is the Due Diligence period?
The length of the due diligence period is negotiable and is determined during contract negotiations. Most of our buyers usually request 30 days for the due diligence period and 45 days to close. This usually allows time for inspections and to finalize their loan process. For buyers with loans already in place, or cash buyers, this time frame may be shorter. For VA or USDA loans, we sometimes request up to 15 more days depending on lender recommendations.
How much is the Due Diligence fee?
The due diligence fee is negotiable and can range from $0 up to 1% of the purchase price or more, depending on the strength of the offer, seller or buyer circumstances and market conditions. The buyer and seller will negotiate this as part of the contract terms. We have seen sellers accept lower offers on price with stronger financing in place and a higher due diligence fee, so this can be an important piece of a strong offer. Although due diligence fees can vary widely, on a typical $250,000 home we usually see a due diligence fee of around $500-$700 in the Lake Norman area, which is about ¼ % of the purchase price. This, combined with the earnest money presented with the offer can make it more or less appealing to sellers in multiple offer situations, which are coming up more and more for good homes. Your REALTOR® can advise you on a good amount for the due diligence fee based on your situation.
What’s the Due Diligence Request and Agreement?
99.9% of buyers hire a professional home inspector to investigate the condition of the home. In addition to a general inspection, most lenders require a termite inspection be performed on the home. Buyers may also choose to inspect for radon, do a septic inspection or get a physical survey of the property. Once the inspections are complete, the buyer will submit a Due Diligence Request and Agreement. This document typically references the home inspector’s report & requests items to be repaired before closing. The next step for the seller will be to get an estimate to see how much it will cost to repair the items the buyer requested. The seller may want to contact past contractors if some of the items are from recent projects, to be repaired at no cost if still under warranty. Regardless of which items the sellers agree to repair, it’s best to know the full cost. Some sellers will also credit the buyer for items at closing if there is not time to make all repairs, or if the seller doesn’t have the cash on hand to make repairs. Also, not all sellers will repair all items requested, so buyers should be prepared for what is essentially a second round of negotiations.
Typically, the buyers will attach the summary home inspection report to their request for repairs. It is from the home inspector and details the actual items found during the inspection. There are certain things that a licensed home inspector in NC can & can’t report on the “summary report”- basically components of the home that aren’t functioning as intended are allowed on here. Cosmetic items are not allowed. The inspector may also recommend that the buyer have other licensed professionals investigate problems, such as electrical, plumbing or HVAC issues, if there is an indication of an issue found by the inspector. These investigations would all be at the buyer’s expense and occur before the Due Diligence Request and Agreement is submitted to the seller.
What will the inspection report look like?
The inspection report is often divided in to chapters and sub sections. The due diligence request references these chapters. It can get confusing if there are extensive and/or detailed items. Your agent may review with you or include notes on what the requested numbered items are to help you decipher the items. Here are some typical inspection items and how they could be referenced:
2.7 2 a& b- left crawl space- Install vapor barrier; Replace fallen insulation
4.14 item 6- Repair steam generator leak
6.6 7 a,b,c- Add new light bulbs so light fixtures work, or repair fixtures if new bulbs do not work
7.4 9- Repair balances on windows
9.4. 11- Install drain line properly for dishwasher
10.26 13a- Fix hot & cold water reversed in shower
11.10 15- Repair loose fasteners on deck
16- Add flashing at deck/ perimeter joist where attached to house for water infiltration
There are many other typical items you can expect to find on inspection reports, so be sure to consult your REALTOR® to help you navigate the ins and outs of this. Please contact Kay Fisher and Associates with other questions on the Due Diligence process or to buy or sell a home today!
Brian Fisher, REALTOR®, Kay Fisher and Associates & Keller Williams Realty®
