The buyer pays a fee to the seller called the due diligence fee. This fee is paid to the seller at the time of acceptance of the offer. How much? If you are the potential buyer making an offer, a hundred bucks sounds good. If you are the seller, that means that, if after fill in the blank days, the sellers get to keep the hundred bucks. During the "due diligence" period, the buyer, IN THE BUYER'S SOLE DISCRETION, could back out on the transaction.
Let's take a really close look at this. You have your $300,000 house for sale. You have a $200,000 mortgage at 5% interest. Your taxes are $1500 per year. Your insurance is $800 per year. Your HOA dues are $600 per year. Just to make sure the story is interesting, let's assume you have moved out and the house is vacant. Every day that you own that house costs you money.
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| Ron Climer can be reached at 828 755 6996 in Hendersonville, N.C. |
How much does it cost you to own that house per day? Your interest is $27 per day or $821 per month. Your taxes are $4 per day or $123 per month. Your insurance is $2.20 per day or $65 per month. Your HOA dues are $1.65 per day or $50 per month.
You receive an offer that is acceptable to you with a hundred dollar due diligence fee. If you accept the offer, you get to keep the hundred bucks no matter what. The due diligence time is thirty days in this contract. The amount of time and the fee is negotiable between the buyer and the seller. This is the deal we made in this example. Twenty nine days later, IN THE BUYER'S SOLE DISCRETION, your buyer decides not to buy your house.
Let's see. Mr. Seller, You have paid 29 days interest ($783) while your house was not for sale. You have paid taxes($116) while your house was not for sale. You have paid insurance ($63) while your house is not for sale. You have paid HOA dues($47) while your house was not for sale. You have probably paid water and electricity while your house is not for sale. It has cost you about $1250 to sit and wait for the. buyer to make a final decision. Your Realtor has not advertised your house. Your house has not been for sale in the MLS. No one has shown your house. Now you are back to square one. The good news is you get to keep the hundred dollar due diligence fee. Your $1250 that you have paid on your not for sale house is wasted. What is the solution? Get a larger due diligence fee from your buyer. The amount of the fee is negotiated between buyer and seller. You can't be mad at the buyer for offering you a hundred dollars due diligence fee. You can only be mad at yourself for not demanding enough due diligence fee to cover your cost of ownership while the buyer is having his inspections done and applying for a mortgage. In our example, that would be $1250. If the buyers state that they only feel comfortable paying $500 due diligence fee, that is no problem. We can shorten the due diligence time to ten days. Get a due diligence fee that will cover your cost of ownership during the due diligence period. All of these terms are negotiable before you sign the contract. They are not negotiable after you sign the contract.
If the buyer backs out for any reason or no reason during the due diligence period , the North Carolina Association of Realtors contract says they get their escrow deposit back. The deal is off. If the buyer doesn't like the home inspection. He doesn't get approved for his loan. He loses his job or his company transfer him to Dallas. His wife leaves him for a better looking guy. No matter why the deal dies during the due diligence period, the buyer gets the escrow deposit back and the seller can keep the due diligence money. If the due diligence money is a hundred bucks, the seller will be annoyed. If the due diligence money is enough to cover the ownership costs, that will seem fair to most sellers. If the due diligence fee is $5000, the seller will be glad the buyer backed out.
How do we determine the due diligence fee? We determine it by negotiation between the buyer and the seller. When the seller receives an offer with a hundred dollar due diligence fee, the seller just counter offers with a $1250 due diligence fee. If your listing agent tells you that is a bad idea, show him this article.
Do not confuse the"due diligence" fee with the escrow money deposit. They are not the same thing. The due diligence fee check is handed to the seller at acceptance of the contract. That money belongs to the seller no matter what happens next. If the deal closes or does not close, the seller keeps the due diligence money.
The escrow deposit is another item. The earnest money deposit is held by an escrow agent, the listing Realtor or an attorney. The purpose of this money is for the buyer to let the seller know that he is earnest and sincere with this offer. If the buyers do not get to closing for some reason that is not excused in the contract, the buyers forfeit that money to the seller. If the due diligence period is ten days, after ten days, the sellers keep the due diligence money. Closing does not occur until thirty days after the due diligence period is over (in our example). The buyers are bound to close. If they do not, they forfeit their earnest money escrow deposit. How much should the earnest money escrow deposit be? Who decides that? It is decided by negotiation between buyer and seller. The larger the earnest money escrow deposit, the fewer problems the seller will have . Insist on a large deposit.
Picture this. The buyers have entered into a contract to buy the seller's house. The buyer's have put up a $1250 due diligence fee and a one thousand dollar earnest money escrow deposit. The due diligence period has come and gone. The inspections have gone well and the buyers are approved for the loan. One week before closing, the buyers find a house that they like muuuuuuch better. They forfeit their earnest money escrow deposit and go buy the other house. If the sellers had insisted on a $25,000 escrow deposit, this would not have happen. If it did, the sellers would not be too mad. Get a large earnest money escrow deposit.
As you read this article, you need to consider your position. Are you a buyer or a seller? As a buyer, a hundred dollar due diligence fee looks good with a $500 earnest money escrow deposit. If you are a seller, you, at least, want the due diligence fee to cover your cost of ownership during the due diligence period just in case the buyer does not proceed with the transaction. Understand this. The due diligence fee does not cost the buyer anything if the deal closes. When the transaction closes, the seller gives the due diligence fee back to the buyer as a credit on the closing statement. It only costs the buyer if the transaction doesn't close. It is going to cost someone if the transaction does not close. Likewise, the earnest money escrow deposit does not cost the buyer anything if the deal closes. If the buyer backs out the day before closing just as the seller is closing the door to the moving van, the seller will be crying. The seller needs to be certain that the escrow deposit is large enough to assuage the pain. In the listing agreement that most North Carolina Realtors use, the contract states that, if the earnest money escrow deposit is forfeited, it will be split fifty fifty between the seller and the Realtor. The real estate listing agent should be agreeing with the seller that a large deposit is a good thing.
If you have property for sale in western North Carolina near Hendersonville or Asheville or Tryon or Saluda or Columbus or Arden or Mill Spring or Lake Lure or Bat Cave, contact me. I can help you with that. If you are interested in relocating to the most wonderful place on earth, call me. If a vacation house sounds appealing, contact me. That is how we got here. We bought a vacation house here in Tryon, North Carolina ten years ago. Last year, we moved from Orlando, Florida into that vacation home. Here is a video about the best kept secret in Carolina. Check it out. https://www.youtube.com/watch?v=8XzOw95TQ0E www.ronclimer.com
