In January of 2011 the North Carolina Association of Realtor’s completely redesigned the Offer to Purchase forms to be used when buying and selling single family homes in our state. One of the hardest things to explain or justify to out-of-state buyers particularly is the non-refundable “Due Diligence Fee”.
So what is the Due Diligence Fee? In short, it is a non-refundable fee that is given to the seller at the “effective” date of the purchase contract which is the day the agreement is signed and delivered back to the buyers or buyers’ agent. If paying by check, the buyer makes the check payable directly to the seller. It does not pass go nor go to an escrow account. The seller keeps it no matter what. The good news is that this fee is negotiable and does get applied to the total purchase price.
So why did the powers that be decide to create this non-refundable fee? In theory, under the new contract the buyer could now cancel for any or no reason whatsoever. (The old contract would only allow the buyer to cancel if the seller refused to make all of the repairs deemed necessary). Feeling that this new “Due Diligence Period” when a buyer can walk away for any or no reason made the seller too vulnerable since they had to change their listing from “active” to “under contract” and essentially take it off the market, they decided to make it more balanced/fair by adding the possibility for the buyer to have some skin in the game by paying the upfront, non-refundable Due Diligence Fee.
At first, since Lake Norman was just coming out of the recession, sellers and listing agents were not necessarily even asking for any Due Diligence money. However, as the market has evolved I have noticed sellers and listings agents are asking for higher and higher non refundable fees and many of my buyers are balking at the thought of making a check out for thousands of dollars to the seller before they have even done any inspections or gotten loan approval. (I understand in some areas of NC they aren’t asking for any Due Diligence Fee).
As is always the case in real estate, the power of negotiations lies more with the seller in a hot market with low inventory and with a buyer in a slow market with high inventory. I am sure the Due Diligence Fee will react accordingly as I am already seeing a marked increase in them as our market gets stronger. In one multiple offer recently the seller came back asking for their price and a Due Diligence Fee of $3000. My buyer walked and a few days later the seller’s agent came back to us with a much more reasonable price. But, it was too late, the damage was done and my buyer had moved on. Lesson learned?
Like everything, I am sure over time the way the Due Diligence Fee is handled will be more balanced and will be driven by our market dynamics. In the meantime, I counsel my clients about the fees and try to make it as reasonable as possible and hope that the other side does the same!