When you are purchasing a home in North Carolina, there are two types of fees you will encounter during your offer process - earnest money deposits and due diligence fees. It is important to understand the difference between the two, and how they will affect your purchase terms. Also keep in mind that while both types of funds are negotiable, neither are absolutely required - it's all up to negotiation between the parties.
Earnest Money Deposits
Earnest money deposits (EMDs for short) have been around longer, and so you may have heard of, or even used, this type of deposit in the past. Earnest money is a negotiated amount of money that buyers give in good faith to show they are serious (or "earnest") about their offer and their desire to buy a property.
Should a buyer breach the terms of a purchase agreement (or what we also call a "contract"), the earnest money then becomes the seller's remedy for any actual or perceived damages they incurred due to holding their home off the market during the contract period. The purchase contract spells out clear terms as to which party receives the funds after a breach by either party; however, both parties must agree in writing before earnest money funds can be disbursed. Even in cases where the termination is simply by mutual agreement of the parties and not caused by some sort of breach, both parties must still agree in writing before disbursal of funds to either party.
EMDs are made out to an escrow agent, which is a person or organization holding the money in an escrow account. Escrow accounts have strict rules and laws to protect the funds against co-mingling with other personal or company funds. The escrow agent holds the funds in the escrow account until the contract either closes or a written termination agreement is signed indicating how to disburse the funds. As long as closing occurs as planned, the earnest money would be credited to the buyer at closing.
Due Diligence Fees
Due diligence fees are a bit different than earnest money. Due diligence fees are paid directly to the seller at the time an offer is accepted and ratified. The due diligence fee is non-refundable except in the event that the seller breaches the contract. However, as long as the transaction closes per the contract terms, the funds would be credited to the buyer at closing.
Which funds are better?
The answer to this question depends upon which side of the transaction you are considering - buyer or seller.
From a buyer's perspective, earnest money is often the best option if the sole desire is to have a refundable deposit. Because the buyer has the right to terminate before the end of the due diligence period for any reason or no reason without penalty, earnest money becomes refundable to the buyer if termination occurs during the due diligence period. As you can see, a seller would not often favor earnest money because the buyer can hold the home off the market throughout the due diligence period without any compensation to the seller. If the buyer chooses to terminate during the due diligence period and receive a full refund of the earnest money deposit, the seller is left with nothing except lost market time.
So, you've likely deduced by now that due diligence fees favor the seller in a transaction. The seller receives payment of these fees directly at the beginning of the contract period, and would not have to refund the fees unless the seller somehow breaches the contract. The buyer does receive credit for the due diligence fees at closing as long as they close per the negotiated contract terms, but the seller then receives the benefit of selling the home. If the buyer decides not to complete the purchase for any reason or no reason, or if the buyer breaches the contract, the seller keeps the due diligence fees as compensation for the time spent off the market. As a buyer, it may be in your best interest to include due diligence fees (or a mix of due diligence and earnest money) when making an offer because such terms usually "sweeten" your offer for the seller. In a seller's market, when many buyers are often competing for the same house, the inclusion of due diligence fees becomes particularly critical. Even in a buyer's market, it can still benefit a buyer to include due diligence fees, especially when some kind of special consideration is needed from the seller (for example, if the buyer has a home to sell before they can complete the purchase, or if the buyer will need a longer due diligence period than is customary for the market, etc.).
In conclusion, your REALTOR® will guide you with advice for your particular situation and the current market conditions. Negotiations can be stressful and complicated, but having a trained professional on your side is the key to success.
Note: The standard Offer to Purchase and Contract (Form 2-T) is the contract form used by most NC REALTORS®, and terms referenced in this blog are based on the usage of this form. If another contract/form is used, please reference the terms of the agreement to determine how funds will be handled.