04/04/2022
UNDERSTANDING THE DUE DILIGENCE FEE IN NC AND ITS EFFECT ON SELLER CONCESSIONS FOR REPAIRS
In North Carolina, real estate agents usually present offers on residential properties using the July 2021 version of Standard Form 2-T (“Form 2-T”). This form is jointly written by the North Carolina Bar Association and the North Carolina National Association of Realtors, Inc.
Form 2-T provides for a due diligence period in which the buyer conducts due diligence. This may include, for example, a home inspection or survey.
A due diligence fee is paid by the buyer for the right to terminate the contract during the due diligence period and receive back the earnest money that has been paid. Time is of the essence, and if written notice of termination is not received by 5:00 pm Eastern on the last day of the due diligence period, then the buyer loses the right to terminate the contract. Additionally, the earnest money comes into play; after the end of the due diligence period, the buyer has no unilateral action that can be taken to get the earnest money back.
As an example, a buyer pays $25,000 directly to the seller as a due diligence fee and $10,000 into escrow as earnest money, with the due diligence period ending on the 15th of the month. At any time by 5:00 pm on the 15th, the buyer can exercise the right to terminate the contract and receive back the $10,000. This can be done by the buyer for any reason or no reason.
Importantly, the buyer does not receive back the due diligence fee if the buyer terminates. The due diligence fee was paid by the buyer directly to the seller on formation of the contract for the right to terminate the contract. So if the buyer exercises the right to terminate, then that money is “gone” and the buyer walks away down $25,000. The buyer does get back the $10,000 earnest money.
If the buyer does not terminate the contract by the end of the due diligence period, then there is no action the buyer can take unilaterally to get the $10,000 back. The $10,000 will remain in escrow to be used toward the purchase of the property at settlement. Additionally, the due diligence fee paid also is used as a credit toward the purchase price.
The seller is under no obligation to perform any repairs that may come to light during the due diligence period. Sometimes the buyer may request that a seller make repairs or provide a seller concession. In doing this, the buyer needs to understand the effect of the due diligence fee paid the buyer on a seller’s willingness to make a repair or provide a seller concession.
Under the premise that a buyer will act logically and will make a decision that places the buyer in a better financial position, a seller would not agree to any repairs or seller concessions that are less than the amount of the due diligence fee that was paid because a buyer would only terminate and walk away if the repairs were more than the due diligence fee.
Continuing the example, had an inspection uncovered repairs estimated at $15,000, a buyer would be better off financially proceeding with the purchase and making the repairs. The buyer in this situation would be down $15,000. If the buyer terminated and walked away with the $10,000 earnest money, then the buyer would be down $25,000, equal to the credit toward the purchase price that was lost because the buyer terminated. Given the two outcomes, the buyer is financially better off taking the $15,000 hit than the $25,000 hit.
It is only when the repairs exceed the due diligence fee that it would be better for the buyer to terminate and walk away. At this point, the seller may wish to consider a seller concession to preserve the deal. Of course, the concession should not be based on the total of the repairs, but for some or all of the difference between the total of the repairs and the amount of the due diligence fee. (Of course, if prices have continued to rise, then the seller also should factor into the considerations whether a higher purchase price would be obtainable if the property were taken back to market.)
In view of the foregoing, a buyer should be prepared to make repairs up to an amount of the due diligence fee paid, and the seller should be prepared to provide concessions based on an amount for repairs that exceeds the due diligence fee paid.
In other words, the higher the due diligence fees, the deeper the hole the buyers put themselves in at the outset.
*** Chad Dustin Tillman is a licensed attorney in North Caroline and practices intellectual property law at Tillman Wright, PLLC with a focus on patents and trademarks. Mr. Tillman also is a licensed broker in North Carolina and a licensed real estate agent (salesperson) in South Carolina, and he is affiliated with the real estate firm of Keller Williams Realty located in the Ballantyne area of Charlotte. The information provided herein is for informational purposes only and should not be deemed legal advice. Any opinions expressed herein are the personal opinions of Mr. Tillman and are not the opinions of either Tillman Wright, PLLC or Keller Williams Realty. ***
