Understanding Due Diligence in North Carolina
In our previous page we discuss in detail what is due diligence? Due diligence in a nutshell is the period of time you get to make sure you want to buy a particular property. Take a look at the below videos to find out even more.
Why Do We Have Due Diligence?
In 2011 the NC Bar implemented the due diligence period in the Offer to Purchase and Contract. Prior to this, a buyer could simply give earnest money with a contract and could easily terminate the contract (for almost any reason – leaving the seller high and dry)
The old contract had a financing contingency, a repair contingency, and an appraisal contingency. The buyer could put in the contract that if repairs exceed a “certain” amount of money, they could walk and not lose their earnest money. This situation definitely favored the buyer as there was no exact way to put a figure on a repair. So, if the buyer was unhappy with the transaction, they could simply use a contingency such as repairs, to get out of the contract. So, in 2011 the new Offer to Purchase and Contract included a due diligence period with a due diligence fee; also keeping the earnest money as part of the contract. This, as you will see, gave the sellers “something” if the contract fell through.
Help Me Understand Due Diligence
For this exercise, let’s see what due diligence MIGHT look like In a sample real estate transaction. For this example, I will use a property listed at $350,000.
Imagine the buyer makes an offer of $345,000 and that offer is accepted on March 1st. Other terms of the contract include:
- A due diligence fee of $2,000
- A due diligence date of March 15th
- A close date of April 2nd.
- Earnest money of $3,000
Here are three possible outcomes of this transaction.
Scenario 1
The first is if the buyer terminates the contract before the due diligence date of March 15th. The buyer does not like the condition reported from the home inspection, so instead of asking for repairs to be negotiated, they just said “I want to terminate”. Buyers can terminate a transaction at any point for any reason. In this scenario, the buyer will lose their due diligence fee of $2,000; forfeited to the seller. The earnest money of $3,000 will be refunded to them as they terminated by the due diligence date. Since the earnest money was held in a trust account, it will be released to the buyer.
Scenario 2
The second scenario is the same reason for termination, but they terminated the contract on March 16th, AFTER the due diligence date. In this scenario the buyer will forfeit their due diligence fee as well as their earnest money.
Scenario 3
The third scenario is one that all parties likely want….the transaction closes. In this situation the due diligence fee and the earnest money is credited back to the buyer at closing.
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There are, of course, certain legal situations where any of the above could be challenged, one example being a “proven” misrepresentation by the seller. But, for the most part the three scenarios above dictate common transactions agents see on a regular basis.
Remember, your real estate agent cannot give you legal advice, but they can explain what the contract says and if there is any confusion or legal advice needed, a buyer or a seller should obtain legal counsel for advice.
If you have any questions on due diligence in North Carolina, contact Stu Barnes today.
