Something as simple as a fee or a deposit should not cause so much confusion, but let me tell you, it can! First-time home buyers & new agents alike usually have common questions regarding the differences between the Due Diligence fee and the Earnest Money deposit. I had difficulty grasping the concepts myself as I was learning various real estate ins and outs. I could not, for the life of me, wrap my head around what happens to these two monies after they are handed off to the seller's agent. Who keeps what and what is refundable? These kinds of questions racked my brain as I was putting together the concepts of the home buying process. It was a real head scratcher to say the least!
As I began practicing actual real estate, the differences between the two quickly became apparent. Just as the names suggest, one is a fee, and one is a deposit. Offering a Due Diligence fee is essentially paying the seller to take their home off the market in order to perform inspections. During the Due Diligence period, a specific time period with a deadline agreed upon by both the buyer and seller, the buyer can choose to back out for any or no reason without being in breach of the Offer to Purchase contract. Do they get their fee back? No, they do not. Can they? Kind of... The Due Diligence fee is paid directly to the sellers, who are free to do with the money what they wish. However, if the sale makes it to the closing table, the buyer will receive a credit towards the purchase price for the amount of the fee paid. It is shown on the closing statement as a credit from the seller to the buyer. Simple enough? Ok.
Now for the Earnest Money deposit. The EMD is a good faith deposit paid towards the purchase of the home. This one is refundable if the buyer choses to back out during the DD period. It shows up on the closing statement as a credit to the buyer, as they've already paid that amount upfront. If the buyer backs out of the contract after the end of the DD period, they will lose both monies (if both were offered.) These types of "prepayments" can be strong leverage tools when presenting offers, especially in multiple offer situations. This current market has been proving that buyers are willing to offer very large amounts of one of both of these monies just to have their offers accepted. To be clear, neither the Due Diligence fee nor the Earnest Money deposit are necessary parts of a successful Offer to Purchase contract. They are simply tools to help buyers show their enthusiasm for a home.
In the next post we will discuss when & how to use these tools to present the highest & best offers for your clients. It's important to understand how these monies play into the loan process as well. Until next time!