Buying Real Estate, Selling Real Estate

Understand Earnest Money vs. Due Diligence Fee

Q: What is “Earnest Money?”

A: It is money a homebuyer gives to the seller (or the seller’s agent) to show the homebuyer’s good faith when making an offer to purchase the seller’s property.

Q: Is earnest money the same as a due diligence fee?

A: No. The “due diligence fee” is a separate, nonrefundable fee a buyer may pay for a negotiated period of time (the “due diligence period”) during which the buyer may perform inspections, obtain loan approval, schedule a property survey or appraisal, review restrictive covenants, and determine whether or not to proceed with the purchase. The due diligence fee is paid directly to the seller under the standard Offer to Purchase and Contract. Before the end of the due diligence period, the buyer has the right to terminate the contract for any reason or no reason at all, while the seller remains bound by the terms of the contract. Buyers typically want to negotiate the lowest due diligence fee for the longest due diligence period, while sellers want to negotiate the highest fee for the shortest period. Regardless, just like the earnest money deposit, no due diligence fee is required by law. If a buyer wants the seller to make repairs, the buyer should ensure that all repairs are made before the expiration of the due diligence period, or have the parties enter into a signed, written agreement to have the specific repairs completed. While the due diligence fee is non-refundable, except in the event a seller breaches the contract, the due diligence fee is typically credited to the buyer at closing.

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