The purpose of “Due Diligence” in a real estate transaction is not designed to be an absolute fail-safe for a buyer, nor a money maker for a seller. The concept is one of shared risk and defined reward. The buyer is risking money and time for the ultimate right to control a property. The seller is risking the opportunity cost of limited market exposure and squandered selling time. There is both a Due Diligence Fee and a Due Diligence Date that both parties of the transaction should understand before entering into an Offer to Purchase Contract.DUE DILIGENCE FEE:
"Thank you, seller, for taking your house off the market while I do my inspections, order an appraisal, get quotes, etc."
As a buyer you are risking money and time for the ultimate right to control a property. The seller is risking the opportunity cost of limited market exposure and squandered selling time. There is no standard dollar amount - it is whatever number both parties can agree on. This fee is NOT REFUNDABLE, though it will be credited back to you at closing if you follow through with the transaction.
DUE DILIGENCE DATE:
"By this date, I will have done everything necessary in order to have peace of mind that I want to move forward with the purchase of your property”.
You need to be able to make an informed decision about your ability and desire to complete the transaction on or before your Due Diligence date. Typically, this date is at least a few weeks after the Effective Date (when the contract has been signed by both parties) so that you have time to get results back from inspections, negotiate repairs, finalize financing, etc. This date should also be at least 7-10 days before the settlement date so that there is time for packing and relocation plans of both parties. Up until this date at 5pm, for whatever reason, if you as the buyer decide to back out of the contract, you will be refunded your Earnest Money Deposit. If you back out on this date at 5:01pm or later, then that deposit will be given to the seller to keep.
The beauty of Due Diligence is that it is purely market driven. It is negotiated between the parties within the atmosphere and market condition of the day. Contrary to what many say, there is no normal, no standard. Each negotiation stands on its own and is influenced by its own particular variables in addition to the over-arching market environment of the moment. As the market changes so does the relative power of the parties.
In a strong buyers market, it provides ultimate protection to a buyer - cancel for any, or no reason. The seller in this market is not in a position to negotiate either a large fee or a short period. Like it, or not, this is how it should be in a buyers market. Lots of inventory and few buyers dictate a buyer driven negotiation where the risk, or cost, associated with time lies mostly with the seller. A sellers compensation for lost market time, etc. may be minimal. A market reality.
In a sellers market, where supply is short and demand is high, the sellers position dramatically improves. The risk, or cost of time now lies more with the buyer. In such a market the buyer has little leverage and the seller is able to hedge risk through obtaining large fees and granting short periods. In a strong sellers market due diligence fees could be in the thousands or even tens of thousands of dollars and due diligence periods measured in days. A buyers cost for the right to decide may be high. This, too, is a market reality.
Somewhere in the middle is a balanced market where negotiation lies at the heart of a good transaction and buyer and seller share the risks.
In all markets what a consumer needs is an experienced agent who understands the undercurrents and vagaries of our local marketplace. One who can drive the greatest demand to your listing in a buyers market. One who embraces the speed and efficiency of technology and prefers a fast-paced environment when you are purchasing in a sellers market. One who is an accomplished negotiator. Finally, here in North Carolina, a consumer needs to work with an agent who embraces and understands Due Diligence. It is a market reality.
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