Due Diligence Fee vs. Earnest Money Deposit
How Much Should My Earnest Money Deposit Be?
At Northstate Equity, we are constantly asked questions about Earnest Money Deposits, Due Diligence Fees, and all the intricacies of North Carolina real estate contracts. If you or someone you know is looking to purchase a property in NC, you must be familiar with how these function. An Earnest Money Deposit, or EMD, is a necessary function within all residential real estate transactions. Essentially being “good faith money,” an EMD conveys to a seller that the person making an offer on their home is serious. Acting as collateral on behalf of the buyer, the earnest money deposit ensures that in the event a buyer backs out, the seller receives something for their wasted time.
Due Diligence Fee vs. Earnest Money Deposit
The majority of contracts used by realtors in North Carolina also include due diligence money. Not to be confused with an EMD, due diligence is paid by the buyer to the seller when the contract is signed. Unlike earnest money, due diligence money is ALWAYS non-refundable, even if a contract is terminated. The purpose of due diligence is to be able to outbid competing offers. There are no limits to what a due diligence fee can be, but a good range is 3-5% of the purchase price.
Who Holds on to my EMD?
North Carolina is an attorney state, meaning that attorneys and title companies work together to complete the closing process. North Carolina law states that an earnest money deposit is to be held by the buyer’s attorney. Only when the attorney receives the EMD, is the offer to purchase contract fully executed. Once deposited, it is credited against the purchase price of the property. In most cases, the funds will be held in the attorney’s escrow account. They will be released from the account with the rest of the money following the closing.
Is Earnest Money Refundable?
Yes and no. Most forms used in North Carolina state that the EMD is refundable as long as the contract is terminated before the end of an inspection period (also called an examination period). An inspection period is the amount of time the contract allows the buyer to determine if they want to purchase the property. If the buyer backs out during the inspection period, the EMD may be refunded. But if the inspection period concludes and the buyer decides they want to terminate the contract, the EMD is non-refundable.
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Assigning the Contract?
In the event you decide you want to pass the property you have under contract on to someone else what happens to the EMD? First, you must make sure the contract states it can be assigned to another buyer. Then, after signing an assignment of contract agreement, the new buyer assumes your role. In this case, they will be responsible for replacing the earnest money you have already put down.
How Much Should my Earnest Money Deposit be?
When negotiating, a seller can request anywhere from $100 to 15% of the purchase price for an EMD. Generally, a great rule of thumb is to expect to put about 1-3% down as the earnest money deposit. Once again though, the purpose of the earnest money deposit is not to outbid competing offers, or to appease a difficult seller. The purpose is to provide both parties in a transaction with peace of mind, by showing your “good faith” financially.
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