A due diligence deposit is important in some areas but not in others. Fees to ensure the value and integrity of the house are different. You pay professionals directly for their services, but in some places, you also put money into an escrow account which the seller holds to make sure you don’t back out of the deal without a cause.
- Fees to professionals to ensure there are no hidden problems can range from a few hundred dollars to over a thousand
- In some areas, buyers need to make a deposit to show good faith and these proceeds go to the seller
- In the event, the deal falls through without a good reason the seller keeps the money, but with cause, the seller usually credits the funds to the price of the house
This topic highlights regional differences. It shows how important it is for you to learn the laws and the ways business is done in your area. Before you hire anyone to help you through the process make sure you understand the market where you buy your home.
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Reasonable inspection Fees
Reasonable fees for residential properties include home inspection, title search, and appraisal fees. These are the standard inspections for a buyer. However, you may want to do other inspections based on the conditions of the house or the area. They may include:
- Radon testing
- Termite and wood-destroying insect inspections
- Septic or underground oil tank inspections
- Asbestos, lead, and mold testing
- Survey (we highly recommend this)
These costs can add up quickly. You should plan to spend at least around $500, and fees can go up to over $1000 the more tests you have done.1
McKee Homes shows us that inspection costs should be at least $500. How much you pay depends on knowing what tests you need. For instance, houses newer than 1978 don’t have lead-based paint, because home builders can’t use it since then. Here are some inspection cots that hopefully give you an idea of what this process costs:
- Home inspections range from around $250 – $400
- Mold tests can be up to $1,000
- Radon testing can $100 – $200
- Sewer scope $85 – $300
It’s very important to know what you need. Does the house have a septic tank or underground oil tank? Is the house in an area where there is a lot of radon? These are questions you need to answer before you get an inspection. A good agent can help you decide which inspections you need.
Every state has different laws, and even within states laws and customs can change drastically from area to area. In most of the country, inspections are the responsibility of the buyer. However, as I did the research for this article, I found one market that does things very different, North Carolina:
- They have a separate deposit besides earnest money
- This is non-refundable if the deal falls through, but it is credited to the sale price at closing
- It is negotiable and ranges from $500 – $2,000 depending on many factors
- The deposit allows the buyer to walk away from the contract during home inspections without any risk other than this fee.
- It is another layer of contract protection for the seller.
I don’t know any other place in the country that has this arrangement (it is certainly possible with the wide variety of laws regarding land). It is, however, an excellent example of why you should know your local market. I saw many cases where people got upset about this deposit, but if you understand how the market in North Carolina works you won’t be surprised.
Who Gets Due Diligence money?
Buyers usually pay fees directly to the professionals doing inspections. In some areas, the seller holds the deposit. North Carolina buyers pay a second deposit called due diligence money. In this case:
- The seller gets the money unless there is a cause to cancel the contract that comes up during inspections
- If the sale closes the seller credits the money to the purchase price of the house
As a buyer, you will always pay for inspections. In at least one area of the country, you must also pay a deposit that protects the interest of the seller.
Due Diligence Money Refundable
Due diligence money is almost always not refundable. A good way to look at inspections is insurance for your purchase. You need to pay to make sure the property does not have any hidden defects.
- You pay the professionals you hire to do inspections, and the seller never compensates you for them
- In areas that require a due diligence deposit, the buyer forfeits the money if they cancel the deal during inspections without cause
- The seller credits the deposit toward the price of the property at closing
- It is refundable with cause if there is a problem that arises during inspections that cannot be resolved
Fees you pay directly to professionals are sunk costs. In the event, you are in an area like North Carolina that has another deposit that money may be refundable. However, the seller only refunds that money if there is a major defect with the property that the buyer and seller cannot resolve.
Due Diligence and Down Payment
Due diligence money, if the meaning is fees paid to professionals, does not go toward the down payment, If you live in an area where there is a deposit for this purpose then it might.
- North Carolina agents hold deposits specifically to ensure the buyer does not back out during home inspections while under contract but before the agent changes the status to pending.
- The seller may credit these deposits toward the price of the property, becoming part of the down payment.
The simple way to remember it is that fees do not go toward the down payment, but deposits usually do.