Paul Jamison and Amber Holt with Kostner Law Firm discuss the importance of due diligence, or home layaway, as it were.
Due diligence can be a scary prospect for some, who are buying a home, because it means that they are giving earnest money to the seller to take the property off the market to allow time to perform inspections, appraisals, and even to lock down their loan before moving forward with the purchase. The buyer is responsible for paying due diligence fees for those inspections and appraisals.
I like to refer to this process as layaway. If you are at a store and find a product that you love, but you are still looking for others. Maybe a better model, or a better price is available at the next store. Paying to layaway the first product means that it is taken off the shelf or rack while you continue to search at other stores. If you don’t find a better product or deal elsewhere and return to the first store, your item is ready to take home. If you find something better somewhere else, you lose the money that you have paid the first store to hold the first item. That’s just smart shopping!
“The buyer wants to buy, and the seller wants to sell.” – Paul Jamison
On the seller’s side, due diligence gives them money to take the home off the market, because other buyers will not be able to buy the property until the you have made a decision. Do you get your earnest money back if you decide not to purchase? Yes, you do! However, you will not be returned any money that you have paid for appraisals or inspections on the property. That’s a small loss compared wo what might have been if you had not done due diligence, and ended up with a property in disrepair!
Question: If a buyer and seller enter a due diligence contract, and money is paid. Then, they mutually agree to end the contract to enter an option agreement, but are unable to agree to terms over the next few weeks, who owns the due diligence money?
The seller owns the due diligence money. The buyer is entitled to their earnest money return. There are special circumstances that might sway this answer, but this is almost always the case. Buyers, be prepared to walk away from your due diligence investment if a deal falls through.
Question: What special circumstances would allow the buyer to recoup their due diligence investment?
This is an important question, especially for young or first-time home buyers, who have only one shot to pay due diligence before their funds are depleted. An appraisal addendum is one way to protect your due diligence investment. What is an appraisal addendum? If a home is on the market for $150K, and the buyer pays to perform due diligence, but the home only appraises for $125K, they are not obligated to move forward with the purchase. Having an appraisal addendum will in effect ensure their due diligence money, and they will be indemnified if they do not purchase.
In the case of an undisclosed material defect, such as a damaged roof, the due diligence contract itself will be the determining factor on how much, if any, due diligence money is returned. That is why the terms of the due diligence contract is important. If a seller doesn’t disclose damage, which is found in due diligence, the buyer needs to be protected from that loss of due diligence money.
In the end, due diligence is a strategy. It facilitates the buyer and seller coming together to begin negotiations on the property. When buying or selling, it’s not all about the price of the home. Don’t just look at the topline number on the property when buying or selling. Terms should be set for due diligence that protect both parties in the process.
Do you have additional questions about real estate or lending myths?
If you’re looking at buying or selling a home, give me a call and let’s work together! I invite you to tune in to my Saturday afternoon radio show each week on WBT. I look forward to hearing from you soon, because Opportunity is Knocking!
Jamison Realty Services Cities in Both North & South Carolina