The Real Estate Process, Home Buying and Selling Tips

Lake Norman Real Estate: What is the new “Due Dilligence” clause mean?

Lake Norman real estate kitten

So here I am about to write about an extremely significant change to our North Carolina real estate contract wondering how in the world I would get you all to read about  this important, albeit boring, subject.  Enter the photo of a cute little kitten.  Did she catch your attention?  Mission accomplished!  Here we go:

Major revisions to the standard Offer to Purchase and Contract form designated for use in residential real estate contracts by the North Carolina Association of Realtors and the North Carolina Bar association became effective January 1, 2011.  So, if you are buying or selling Lake Norman real estate, here are the key elements:

  • Removal of the entire section and deadlines related to physical inspections and repairs
  • Removal of  the separate deadline and conditions for the buyer’s loan, survey, insurance appraisals etc.
  • New Due Diligence Period and Due Diligence Fee/Buyers right to terminate for ANY reason
  • Distinction made between the “Settlement Date and the Closing Date

Per the new contract:  “Buyer shall have the right to terminate this Contract for any reason or no reason, by delivering to Seller written notice of termination during the Due Diligence Period (or any agreed-upon written extension of the Due Diligence Period), TIME BEING OF THE ESSENCE.  If buyer timely delivers the Termination Notice, this Contract shall be terminated and the Earnest Money Deposit shall be refunded to Buyer.

The bottom line is that the buyer no longer has separate deadlines for their inspections and loan approval AND the seller is no longer obligated to make any repairs.  In an effort to lessen or remove the contentious repair negotiations, the buyer now has one “Due Diligence” deadline, time being of the essence, in which to make all property investigations,surveys, insurance AND obtain their financing.  The appraisal should also be included during the Due Diligence period.  (The contract goes in to more detail as to what the buyer could and should investigate and accomplish during this period.)  Any time during or by the deadline date of this period, the buyer can either terminate the contract or go forward.  After the Due Diligence date, if the buyer defaults (can’t get their loan etc.) in most cases the seller now has the right to retain the Earnest Money Deposit.

The length of the Due Diligence period is completely negotiable between buyer and seller.  In most cases, the current market climate will help dictate how long this period will be. During today’s buyer’s market, the Due Diligence period seems to average about 30 days.  When I was selling real estate in California in the hot seller’s market of the early 2000’s (we had a similar contract clause then) the inspection/loan deadlines were extremely short or removed entirely.

The greatest challenge with this new Due Diligence Period is to make it long enough to allow the buyer to get formal loan approval yet not so long that the seller won’t agree to the date because they will be too vulnerable for too long.  It is hard for a seller to know that the buyer can walk at any time for any reason.  It is also hard for the buyer to set a shorter deadline knowing that their loan may fall through at the last moment and they will then loose their earnest money deposit.

The authors of this new contract feel that this balances the risks equally between buyer and seller.  While I don’t have a problem with the concept since this is how our California contracts worked, I don’t like the fact that they combined the inspections and the loan into one deadline unlike in California where we had one deadline for the inspections and one for the loans.  That enabled us to make much shorter deadlines for the inspection period and longer for the loans.  Here, we really need 30 days for most loans yet really only need a week or so for inspections but will now have one deadline for both.

It is very important to undertand that this is a Time is of the Essence deadline so there is no wiggle room  After the end of the Due Dilgence Period, the buyer should  expect to loose  their earnest money if they default on the contract and fail to close.  If the seller defaults, the buyer does get their earnest money back.

There are many additional revisions to the Offer to Purchase and Contract but these are the most significant. Please feel free to email me with questions.


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