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Due Diligence and the Offer to Purchase
Over the past 8 years, North Carolina has implemented a revised Offer to Purchase and Contract form. Please read, I have highlighted the due diligence section.
If you haven’t purchased a home since 2011 or are from another state, you might be surprised by the NC contract forms. They are frequently updated, and this article will focus on the Due Diligence sections.
Key Differences in the NC Contract
When making an offer on a home in North Carolina, you’ll need to provide two deposits: the Due Diligence Fee and Earnest Money. The amounts for these fees vary depending on factors such as market conditions, buyer qualifications, and property condition. Customary amounts may differ across areas or towns in NC.
If you successfully purchase the property, both deposits will be credited towards the purchase. If you decide to cancel the contract during the Due Diligence period, the seller keeps the Due Diligence Fee, while the Earnest Money is returned to you.
Understanding the Due Diligence Fee
The Due Diligence Fee is similar to an option fee. The buyer pays the seller to reserve the property while the buyer inspects the property and secures financing. During this time, the buyer can cancel the contract for any reason, even if they simply change their mind.
The contract states that the house is sold “as is,” and the seller isn’t required to make repairs. However, repairs are often negotiated during the Due Diligence period since the buyer can back out and only lose the Due Diligence Fee. The seller usually prefers to reach an agreement to ensure the transaction proceeds.
Canceling the Contract
If the buyer cancels the contract before the Due Diligence period ends, the attorney refunds the Earnest Money, and the seller keeps the Due Diligence Fee. The deadline for this period is always a nerve-wracking time, as the buyer has likely invested in inspections, appraisals, and the Due Diligence fee.
Due Diligence Fee Factors
The Due Diligence Fee depends on various factors, including the time the house has been on the market, competing offers, price, and the property’s condition. In the competitive market of 2021-2022, Due Diligence Fees have soared to 30-50K, often leading buyers to waive inspections and appraisals.
Earnest Money
In the Triangle area, Earnest Money, a security deposit, is typically between 1-3% of the purchase price, with 1.5% being common.
Preparation for Buyers and Sellers
Buyers should be well-prepared, as the Due Diligence Fee requested by the seller is determined by the perceived risk of taking the house off the market. The more prepared a buyer is, the more likely they are to negotiate favorable terms for both parties.
Tips for Well-Prepared Buyers and Sellers
A well-prepared buyer can have the upper hand in a competitive market. Here are essential steps for buyers to follow:
- Obtain a pre-approval with supporting documents, including:
- Tri-merge Credit Report review
- Income documentation review
- 2-year work history confirmation
- Debt to income calculation
- Automated Underwriting Approval
- Be ready to buy within the next 60 days
- Offer reasonable Earnest Money Deposit and Due Diligence Fee
- Review disclosures and homeowner documents
- Not have a house to sell
- Have no other contingencies
- Be flexible with the closing date
For sellers to receive a reasonable Earnest Money Deposit and Due Diligence Fee, they should also be well-prepared:
- Price the home correctly and be willing to accept a reasonable price
- Conduct a pre-listing inspection and make necessary repairs
- Avoid needing approval from a lender (short sale) or bankruptcy court
- Allow the buyer a reasonable Due Diligence Fee and period
- Be flexible with the closing date
- Stage the home and ensure it’s in excellent condition (including the yard)
- Provide the buyer with all disclosures and a current market analysis supporting the asking price
- Have a clear title and have owned the property for more than one year
The Importance of Pre-Approvals
Pre-approvals are crucial, as they can influence the Due Diligence period and the buyer’s perceived strength. Sellers may accept a lower fee for pre-approved buyers. Buyers should secure a pre-approval and ensure loan eligibility before risking the Due Diligence fee.
Many seller agents require a pre-approval letter from a local lender with an offer. Although buyers can shop around after pre-approval, having a well-known local lender can strengthen their offer. This refers to the mortgage broker or loan officer, not just the company. A selling agent will have more confidence in closing the loan if it’s through a reputable local lender, which can make a significant difference in the transaction. Give yourself an advantage and get a strong pre approval letter!!
