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FREQUENTLY ASKED QUESTIONS

DUE DILIGENCE 

What is Due Diligence?

Due diligence is a negotiated period of time during the real estate transaction in which the buyer has the opportunity to investigate the property. Typically, this time is used to conduct the inspections, obtain loan approval, schedule surveys, appraisals, review restrictive covenants, and any other items that will help the buyer determine whether to proceed with the purchase or terminate the contract.

Many buyers employ professionals to inspect and report on the structural and mechanical systems of the home. Having the home inspected by a licensed home inspector allows the buyer to make a more informed decision about the purchase. Some items addressed in a home inspection include:

  • Exterior & structural components

  • Roofing condition

  • Plumbing

  • Electrical systems

  • Heating and air conditioning systems

  • Condition of walls, ceilings, flooring, windows, and doors

  • Insulation and ventilation

  • Radon

  • Wood destroying insects

    Before the end of the due diligence period, the buyer has the right to terminate the contract for any reason.

Is there a fee for due diligence?

It is not required by law, but most sellers do require it as compensation for taking their house off the market while the buyer investigates the property.

How much due diligence money should be given to the seller?

The fee is negotiated between parties. If is typically a small percentage of the purchase price depending on market conditions.

What happens to due diligence money?

It is paid directly to the seller.

Is this fee applied to the purchase price of the home at closing?

Yes.

What happens if the buyer backs out of the contract before the due diligence period is expired?

The seller keeps the due diligence fee; however, the earnest money is typically refunded. Please see the earnest money brochure for further information.

What if needed repairs are identified during the due diligence period?

Repairs are typically negotiated with the seller during this time. Please note that sellers are not required to make any repairs; however, it is common to negotiate either repairs or some amount of monetary compensation to help with the cost of repairs.

All repairs should be outlined in an agreement and signed by both parties prior to the expiration of the due diligence period. If a seller chooses not to make repairs or provide any monetary compensation, they are not in breach of contract. Buyers still have a right to terminate the contract proper to the due diligence expiration

EARNEST MONEY

What is “earnest money”?

It is money you give to the seller (or the seller’s agent) to show your good faith when making an offer to purchase the seller’s property.

How much earnest money should I pay?

The amount is negotiated between you and the seller. It is typically a small percentage of the purchase price and can vary depending upon local market conditions, the price of the property, the type of property (e.g. vacant land existing housing, or new construction), whether cash advances to a builder or seller are involved, and other factors.

What happens to earnest money before closing?

The purchase contract governs where earnest money will go. It should also specify the amount(s) to be paid, when the payments are to be made, whether the money will be held in a trust (escrow) account, who will hold it, whether it will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.

Will my earnest money earn interest between contract and closing?

Probably not. Most earnest money is held by real estate brokers in non-interest- bearing trust or escrow accounts. In order for the money to earn interest, the buyer and seller must agree, and they also must determine who will earn the interest. Such an agreement should be included in the purchase contract and may require the assistance of an attorney to prepare.

Who can hold earnest money?

Any person or entity) agreeable to you and the seller, but usually a licensed real estate broker. As a buyer, be aware that if you allow earnest money to be held in deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close (due to the seller’s death, divorce, bankruptcy, judgment liens, receivership, fraud, tax liens, title problems, etc.) Consequently, most buyers prefer to have real estate agents or licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used.

Is earnest money the same as a due diligence fee?

No. The “due diligence fee” is a separate, non-refundable fee a buyer may pay for a negotiated period of time (the “due diligence period”) during which the buyer may perform inspections, obtain loan approval, schedule a property survey or appraisal, review restrictive covenants, and determine whether or not to proceed with the purchase. The due diligence fee is paid directly to the seller under the standard Offer to Purchase and Contract.

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