What does the term “due diligence” mean and why is it important to know in a real estate transaction?
To answer the first question, due diligence essentially means two things:
- It’s a specific fee paid to the seller.
- It’s a time period in which the buyer gets to inspect the home, have an appraisal done, examine restrictions and covenants, order a survey, and anything else they want to do to ensure they’re able to move forward with their purchase.
This term is something both buyers and sellers must know because the due diligence fee is non-refundable after the due diligence period is over. If, for whatever reason, the buyer backs out of the deal afterward, you’ll be compensated for taking your home off the market. If you’re a buyer and you want to terminate the transaction, make sure you do so during the due diligence period or before it’s over.
It’s important to distinguish this fee from the earnest money deposit, which is a fee that’s held in escrow that acts as a good-faith deposit that the buyer will follow through with the purchase. Unlike the due diligence fee, earnest money is refundable. If and when the buyer closes on the home, both of these fees are credited back to them.
If you’re a seller and you have multiple bids for your home, focus on the due diligence fee of each contract because this tells you who’s really invested in buying your home. If you’re a buyer in the midst of a multiple-offer situation, beefing up your due diligence fee will make your offer much more attractive.
As always, if you have any questions about this or any other real estate topic, don’t hesitate to reach out to me. I’d love to help you.