Here’s what to know about it:
After a purchase agreement is executed, the potential buyer has the option to pay a due diligence fee to the home seller. In exchange for this payment, the seller agrees to take the home off the market while the buyer conducts due diligence on the property. Essentially, this payment puts the sale on pause.
The buyer can then use this time to complete inspections, including, but not limited to, ones that may not be required by the lender. The buyer can review title work, contemplate whether the property truly meets their needs, review the quality of work done on the property that was promised by the seller, confirm zoning regulations, HOA fees … essentially anything that the seller wants to review before the final closing, they can do during this interim.
As far as how long this “pause” lasts is a matter up for negotiation. But the amount of the due diligence fee should reflect how long the buyer would like that time to last. Because that whole time, the seller is unable to list the home, show the home or market the home as for sale.
This protects the buyer from losing out on the home to someone else who might come up with a more attractive offer. But what of the protection for the seller?
Here’s what’s important to know about the due diligence fee in Ohio (and other states where this exists). It’s non-refundable. And this is an important distinction from earnest money.
Earnest money demonstrates intent to buy. It’s money paid to the seller, held in escrow, to show that the buyer is serious about their offer. If the sale goes through, the earnest money comes off the price paid.
If the buyer backs out for any reason pre-stated in the contract, such as financing fell through, earnest money is returned to the would-be buyer.
On the contrary, due diligence money is paid directly to the seller, not held in escrow. Basically, the buyer writes a check or wires funds directly to the seller. That money is never coming back to the buyer. It’s not coming off the sale price.
It’s extra money, paid after the purchase agreement is signed, to have the property taken off the market while due diligence is done.
Consider that the seller is now at a disadvantage, waiting on a buyer that could back out of the sale, depending on whether they’re happy with the results of due diligence. For this reason, that due diligence fee belongs to the seller now. They can use it as they like, including on things unrelated to the sale of their home. It’s bonus money in the checking account.
It can be spent anything under the sun — or saved — and it’s no one’s business what they use it for. No report must be filed. It’s cash, free and clear. That’s the compensation they get for taking their home off the market for a specified length of time while the buyer conducts due diligence.
How much is paid depends on the negotiation, facilitated by the real estate agents on each side. But higher-priced homes and lengthier due diligence periods typically demand higher due diligence fees. They can range from a few hundred dollars to several thousand.
Consider all aspects
Buyers who want to maximize the power of their due diligence fee paid should carefully consider all the aspects. First is to know that paying that fee doesn’t automatically extend deadlines, grant them an indefinite due diligence period or guarantee anything. Everything must be spelled out in the contract.
Since the money is non-refundable and isn’t applied to the purchase price, it behooves would-be buyers to carefully time the due diligence period, especially when inspections must be conducted by third-parties with busy calendars.
Understanding the terms of the contract is essential for all parties, but especially for homebuyers who should only agree to a fee they are comfortable parting with.
Paying a due diligence fee in Ohio gives homebuyers a competitive edge over other potential buyers who are unwilling to pay this fee, and by keeping a promising home off the market for a time period. Buyers benefit from being compensated for removing their home listing from the market.
The success of any home purchase that involves a due diligence fee depends on the expertise of experienced real estate agents who know how to navigate this grey area.
About the Author