Looking for due diligence money?
What does due diligence money mean in simple terms?
What’s the difference with earnest money?
In this article, I will break down the meaning of due diligence money in real estate so you know all there is to know about it!
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Table of Contents
What Is Due Diligence Money
Due diligence money refers to an amount of money a home buyer pays a seller as soon as a purchase offer is accepted and the homebuyer’s due diligence period begins.
In essence, due diligence money is an amount of money that a potential home buyer agrees to pay a property seller to compensate the seller for taking off his or her property from the market during the due diligence period.
During the due diligence period, the buyer has the right to inspect the property, get a property appraisal, do research on the title of the property, review the homeowners’ association bylaws and rules, and so on.
If the buyer is satisfied with the outcome of the due diligence, then the transaction will go through and the due diligence money will get credited toward the purchase of the home.
However, if the buyer withdraws from the transaction, the due diligence money will be used to compensate the seller for having withdrawn the property from the market during the due diligence period and potentially having missed out on other interested buyers.
Why Pay Due Diligence Money
Buying a home or real estate property is probably one of the biggest investments a person can make in his or her lifetime.
As a result, it’s important that you make sure that you pay for a property for what it is truly worth and have all the proper information on the property before making a final decision to move forward with the purchase.
Typically, when buying a home, a buyer will want to get the property inspected, appraised, title researched, and so on to ensure that there are no hidden defects or other factors that may influence his or her purchase decision.
This investigation is called due diligence in real estate.
When a contract is signed and the buyer’s due diligence period begins, the seller will generally remove the property from the market thereby losing out on other interested buyers.
The due diligence money is a good faith payment made by the buyer to show the seller that he or she is interested and serious in purchasing the home and to compensate the seller for taking the property off the market should the buyer decide not to go through with the home purchase.
When Is Due Diligence Money Due
Generally, the due diligence money is paid upfront when an agreement is reached for the sale and purchase of a real estate property.
This means that the buyer will have between 24 hours to 5 days to make the due diligence money payment.
Due Diligence Money vs Earnest Money
What is the difference between due diligence money and earnest money?
Both the due diligence money and earnest money are good faith payments.
The main difference between due diligence money and earnest money is that due diligence money is non-refundable and paid to the seller whereas earnest money is refundable and paid to the escrow agent.
Also, the due diligence money is typically a flat amount that is negotiated between $500 to $5,000 whereas the earnest money is calculated as a percentage of the property value such as 1% to 2%.
The due diligence money is a good faith payment that is made directly to the seller as compensation for the buyer exercising the right to cancel the contract whereas the earnest money is paid to the escrow agent and is refunded to the buyer if the seller is unable to fulfill the contract.
Both the due diligence money and earnest money get credited for the purchase of the home if everything works out smoothly.
Every state has different rules with regard to the payment of good faith money and earnest money in making it mandatory or not.
It’s important that you consult a real estate attorney or real estate professional to find out how the due diligence money requirements work in your jurisdiction.
Due Diligence Money FAQ
Let’s look at some frequently asked questions related to due diligence money in real estate.
Do you get due diligence money back
The due diligence money is generally not refundable.
The only time where you can expect to get your due diligence money back is when the seller chooses not to proceed with the transaction during the due diligence period as per the terms of the agreement.
How much is due diligence money
The due diligence money is typically a flat amount that is negotiated between the buyer and the seller of a property that can range between $500 to $5,000.
Keep in mind that the actual values can change depending on the value of the real estate property, the conditions of the market, jurisdiction, and so on.
What is the due diligence period
The due diligence period is the period of time a buyer negotiates to further investigate a property before purchasing it.
Typically, the buyer will perform the following during the due diligence period:
- Property inspection
- Property appraisal
- Get property financing
- Perform title search
What’s important to note is that the buyer will have the right to back out of the deal during the due diligence period should the investigation reveal something that the buyer is not happy about or for other reasons.
How long is the due diligence period
The due diligence period is a period of time that is negotiated between the buyer and seller of a real estate property allowing enough time for the buyer to perform his or her “due diligence”.
Typically, the due diligence period can be between seven days to thirty days depending on the nature of the due diligence the buyer intends to make.
Is due diligence money mandatory
Every state will have different laws relating to the mandatory payment of due diligence.
In general, due diligence money is not mandatory and is an amount that is negotiated between the buyer and seller of a property.
The due diligence money is paid as a sign of good faith showing that the homebuyer is serious about the purchase.
Does due diligence money go towards down payment
The due diligence money is an amount that a potential buyer pays the seller once a purchase offer is signed and will get credited toward the purchase of the property if the buyer does not back out of the deal.
In essence, due diligence money is a non-refundable amount that goes towards the down payment to the extent the buyer proceeds with the purchase.
If the buyer withdraws from the transaction, then the money goes towards compensating the seller having lost other opportunities to sell.
How to get due diligence money back
In general, when you pay the due diligence money to the seller, you will no longer be able to get the money back.
Depending on the terms of your purchase offer, the seller may have the right to pull out of the deal and in that case will no longer be entitled to the due diligence money.
As a result, when buyers withdraw from the deal, they will forfeit their due diligence money.
What is the difference between due diligence money vs earnest money
Although both the due diligence money and earnest money are good faith payments made by real estate property buyers to sellers, they are not exactly the same thing.
Let’s look at the difference between due diligence money vs earnest money.
Here are the main features of due diligence money:
- It is paid to the seller
- It is between $500 to $5,000
- It gets credited towards the purchase price if the buyer goes through with the purchase
- It is non-refundable
- It’s to compensate the seller for removing the property from the market
Here are the main features of earnest money:
- It is paid to an escrow agent
- It’s usually calculated based on a percentage of the property value (1 to 2 percent)
- It gets credited towards the purchase price if the buyer goes through with the purchase
- It is refundable if the seller does not fulfill the contract
Due Diligence Money Takeaways
So there you have it folks!
What is due diligence money in real estate?
Can I get my due diligence money back?
In real estate, due diligence refers to the period a home buyer has the opportunity to investigate the desired property following the acceptance of a purchase offer and before the formal closing of the transaction.
Typically, the buyer will have the right to terminate the contract and withdraw from the purchase of the property before the expiration of the due diligence period.
In that eventuality, before agreeing on the terms of the purchase offer, the seller may request due diligence money to compensate him or her for the eventuality that the buyer chooses to withdraw from the deal.
Now that you know the meaning of due diligence money, if it’s refundable, when it is paid, and how it works, good luck with your home purchase and research!
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