Real Estate Contracts now have some really important negotiated points on them that First Time Home Buyers and (second or third time buyers) need to understand.
Especially when it comes to Earnest Money Deposits, what happens to that money if you change your mind and don’t want to buy the house… and what is the “Due Diligence” fee all about!?
First Time Home Buyer Contract Negotiations
When you put an offer in on a property – you will typically attach a couple of checks. In times past – this was a check that pretty much followed the contract from Buyer to Seller (often times BACK to Buyer where the contract was amended) and back to the Seller until both sides agreed on the terms. Once the contract suited both parties, typically the Seller’s Listing Agent held the money in Escrow until closing.
Prior to 2011, “earnest money” was the only money that was put up, up front. Earnest money was put in place primarily to show “earnestness” from the buyer and to help compensate the seller for their lost time and opportunities (from other prospective buyers) if the buyer “flaked out” basically. As long as everything went fine and the deal went to closing, the earnest money would be credited back to the buyer at closing and everyone was happy.
Now there’s a Due Diligence Period
The due diligence fee is an amount paid by the buyer directly to the seller – and no matter what happens… once the contract is agreed upon, the sellers get to keep the Due Diligence Fee. This is one of the checks that follows the contract from Buyer to Seller, and it gets deposited as soon as the contract is agreed upon.
In addition to the due diligence fee, there is a negotiated due diligence period. The fee is really allowing the buyer to “peek under the roof” and be certain that they will want to purchase the home. As the First Time Home Buyer conducts their “due diligence” looking at inspections and reviewing an appraisal, the Seller has their home off of the market. If the buyer decides, for ANY REASON during that due diligence period of time, the contract is ended, and the BUYER keeps their Earnest money.
Typically, the Buyer’s Agent tries to get the Due Diligence Check to be as Nominal as the Seller will Accept!
After the Due Diligence Date – even if the First Time Home Buyer is TURNED DOWN FOR A LOAN – they can not get the Due Diligence Fee back. We think this is another good reason for Buyers to work with US (we understand how this works!)! This is because with the new contract, there is no longer a financing contingency. If no “obstacles” occur, the buyer will have that amount credited back to them at closing.
The First Time Home Buyer EARNEST Money Check
The larger check, these days, is typically the Earnest Money Check. It’s the negotiated check that is deposited with the Due Diligence fee check. In most cases, the Earnest Money is held by a Third Party (in NC that’s usually the Selling Agents Brokerage) and is credited towards the home buyer’s down payment and/or closing costs. Remember that once the contract is agreed upon, the check is actually cashed, so be sure your funds are available.
The reason I said this is the “larger “check is because if you want the Seller to consider you a “strong” First Time Home Buyer, you want to put a couple of thousand dollars into a $200,000 transaction. The Seller is taking a risk, by taking their home off of the market.
DISCLAIMER: We are NOT Real Estate Agents… we are Mortgage Lenders. We are ONLY describing what we typically see when it comes to dollar amounts. You NEED to use the representation of a Real Estate Agent when Buying a home!
If the buyer backs out prior to the end of the Due Diligence date, they will at least get their earnest money back. Meaning that if the house has repairs that the Seller refuses to make, you will still be charged with the Inspection Fee, the Seller keeps the Due Diligence Fee deposit – but you get all of your Earnest money back!
With the new contract, the buyer is given more freedom and the seller is protected from being left empty-handed at the last-minute if financing falls through.
So, let’s say worst case, you could not negotiate repairs (or you fall out of love with the house for some other reason) BEFORE the end of the Due Diligence period – how much could you be “out?” Even if the contract says the Seller will pay the Appraisal Fee (for instance) what that really means is that they will pay for it at the closing table… so if you don’t close, they are not paying for it. Fees you might lose include:
- The Due Diligence Fee
- Appraisal Fee (normally $425 VA Loan Appraisal Info)
- Credit Report Fee (normally less than $60)
- Home Inspection Fee (we’ve seen most much less than $500 – USDA Home Inspection Requirements, )
Hopefully the Title Work by the Attorney will not be done prior to the end of the Due Diligence period – because if you order it, and the loan does not close, you could be responsible for that fee too!
In reading back through this, it seems like a HUGE risk is now being taken by the First Time Home Buyer! The new contract DOES give more help to the Seller than they previously enjoyed… but this is WHY we keep saying : “USE A REAL ESTATE PROFESSIONAL” when you are purchasing a home! The Agents we know do TONS of extra work to verify that the property is not going to have an appraisal problem… they are keeping tabs on the Due Diligence Date, they are finding out as much as they can about the property, and its history before the contract is concluded…
The Good News is that the Real Estate Agent knows how to negotiate all of this for you! Now is not the time to try to “Go It Alone!” You need a great team of professionals to help you!
In most cases we look at right now – Home-ownership is CHEAPER than renting! If you are a first time home buyer – call us! We work with some of the best Real Estate Agents in the State of North Carolina, and we would be HAPPY to refer you to someone! Steve and Eleanor Thorne 919 649 5058 No Money Down Home Loan specialists!