"Diligence is the mother of good fortune" - Benjamin Disraeli

You would think that as a real estate agent in the third fastest-growing real estate market in the country (depending on whom you ask) I would spend MOST of my time talking to clients about things like market conditions, inventory, and interest rates. While those 3 are heavy hitters in my day-to-day conversations, the topic I talk to my clients most about is:

The Due Diligence Fee

As far as I know, North Carolina is the ONLY state in the country that has a non-refundable due diligence fee as part of their contract. If you're just tuning in, the due diligence fee is a non-refundable fee a buyer offers a seller to take their house off the market and allow exclusive access to conduct their due diligence. This is typically when a buyer gets their home, pest, and radon inspection as well as their appraisal and any other inspections or consultations that may be warranted. Here's how a typical offer is structured:

Buyer offers the seller XX amount for their home (purchase price), along with XX amount in due diligence, and XX amount in earnest money. The due diligence FEE (re: non-refundable) is paying for what's known as a "due diligence period" which is a date later specified in the contract. If the seller accepts, the buyer writes a check for the due diligence fee to the seller and the earnest money DEPOSIT (re: refundable under certain conditions) check goes to the closing attorney where it's held in an escrow account. If a buyer terminates the contract DURING the due diligence period, they lose their due diligence fee and get their earnest money deposit back. If they terminate AFTER the due diligence period, they forfeit both the due diligence fee and the earnest money deposit. Upon a successful closing, the due diligence fee and earnest money deposit get applied towards the buyer's closing costs. You can think of it as money they've already paid into the deal. These are not additional expenses.

Why are we the ONLY state with a due diligence fee?

I don't know for sure and what I'm about to share is anecdotal stories passed down to me at the proverbial water cooler from agents who've been in the business WAY longer than I have. Due diligence became a thing around 1993 and the idea was that it offered the seller a nominal amount of money to serve as protection in the event the buyer terminated the contract. In NC, only the buyer can unilaterally terminate a contract so what was happening was buyers and sellers would enter into an agreement and 3 or 4 weeks later buyers would just terminate because they found something better or for ANY OTHER REASON which in turn costs the seller time and money. Let's be real, we all know the first thing that goes through our heads when we see a house that went under contract and is back on the market. We think, "What's wrong with it?" or "Maybe I can get a deal". So if a buyer can terminate without consequence then it could cost a seller in several ways like additional mortgage payments when they've already moved AND it adversely affects marketability. From what I've been told, in the early days a buyer would offer around $100 for every week they wanted as their due diligence period. Not so bad right? Fast forward a few decades to when I got in the business in 2017 and the general rule of thumb was that the due diligence fee and earnest money deposit should equal around 1% of the sales price. The idea is that you want to get in with as low of a due diligence fee as possible and put the rest in earnest money because it's protected in the event there are serious issues on the home inspection.

So what happened?

As time went on; the market started to get more and more competitive and buyers began to leverage the due diligence fee to win in multiple offer situations. The idea here is that a buyer puts more money as a due diligence fee to demonstrate to the seller that they're serious about buying the house and are less likely to walk away from the deal because they have so much "skin in the game". The due diligence fee became a VERY compelling term. Sometimes even more so than the purchase price. On more than one occasion I have had my buyer's offer accepted because they had the highest DD fee and not the highest purchase price. After the COVID boom, I saw due diligence fees that were $20k, $30k, all the way up to $100k. I heard a story from one of my attorneys that they once saw a contract where the entire purchase price was a due diligence fee. WHAT!? My little Realtor's head exploded. I couldn't even begin to fathom the implications of such an offer. I remember the first time I counseled a client to put $5000 as a due diligence fee. I was shaking in my boots and had goosebumps all over.

So where are we now?

My goal with this newsletter is to give you my boots-on-the-ground perspective of what I'm seeing in the market. If you're thinking of buying a home, what winning offers are putting down in due diligence is SUPER important because that's how much cash you'll need on hand when you go under contract. I'm talking about delivering a due diligence check the day you go under contract or the day after. I'm going to give you the average due diligence fees from my clients for the last 3 years that we offered and received. Remember, about 75% of my business is in Durham with the rest in Raleigh, Cary, and the surrounding areas. An agent who works exclusively in downtown Raleigh or West Cary might have different numbers than me.

2021: $14,750

**with the lowest DD $100 and the highest $100,000. Gives you a sense of what kind of year that was!**

2022: $14080

2023: $6670

Am I saying that if you want to buy a house today you need to put at least $6670 towards due diligence? Absolutely not. Remember that despite the interest rate environment we're in, the Triangle is still a seller's market so when the right house comes on in the right location, with the right price and condition it's going to go under contract fast and the winning offer will likely have a due diligence fee ABOVE $6670. If it's been on the market for a few weeks, maybe not. Another thing to consider is that when interest rates come down, there's going to be a lot of buyers that come out of the woodwork and we're going to see more and more competitive, multiple offer situations which will drive up due diligence fees that buyers offer.

My two cents: things got a little crazy the last couple of years with due diligence ESPECIALLY in the COVID boom. People were making sight-unseen offers with due diligence fees in the 10's of thousands of dollars and I will not be surprised at all when an onslaught of lawsuits follow, if they haven't already. I'm personally happy that the expectation has come down and buyers don't have to bet their life savings on a house they maybe got to walk through for 15 minutes. It'll be interesting to see what happens when market activity starts to heat up.

Be safe. Be Smart. Be Content. Have a wonderful find,