Within North Carolina’s Offer to Purchase and Contract (Form 2-T) is a category defined as the Property Investigation Period. This section of the Offer to Purchase and Contract sets forth the time parameters within which the buyer has to ‘investigate’ and make a determination to purchase the property, or not. The term ‘investigate’ is more than just ‘checking out’ the property, but rather is an in-depth process. Buyers should familarize themselves with the purchase contract early on in their property search and, if necessary, request an explanation of how this section of the contract applies to the purchase. The time for discussion, clarification and explanation of the Property Investigation Period is before actual purchase decisions arrive. In no instance should buyers sign a purchase contract unless they are comfortable with how this section of the contract applies in their case. If you happen to be a seller you should receive a sample Form 2-T during the listing process along with an explanation by the listing agent. Bear in mind that consulting a competent real estate attorney is always advised if you want a legal opinion as to how a particular situation applies to you.
Due Diligence Period (North Carolina)
The Due Diligence Period (DDP) is a part of the Property Investigation Period. The DDP is a negotiated period of time set forth in the Offer to Purchase—between seller and buyer—during which the buyer will proceed with the investigation of the property in order to prepare for a purchase or to make a decision to not purchase. It is also the time period that will determine how earnest money is distributed in a real estate transaction in the event one of the parties does not comply with the contract provisions. Strict adherence to dates and times in the contract must be followed.
Some of the more common items to be taken care during the DDP include Home Inspection and Environmental Inspections and their repair resolutions, obtaining a mortgage loan approval, review of restrictive covenants and other deed limitations, obtaining a suitable property survey, verifying compliance with zoning, building code, water/sewer and subdivision issues, investigating sufficiency and adequacy of title, determining if property insurance can be obtained, as well as any other items that the buyer needs (or wants) to address in order to prepare for closing. Within the DDP buyers will also need to verify that anything they think, or have been told, comes with the property actually does come with it—e.g. boat slip on a lake, membership in a club, use of clubhouse for special events, ownership of fuel tanks, payments for maintenance or additional construction has actually been paid (receipts obtained) and so on.
Different Rules in North Carolina and South Carolina on Process
Experienced buyers and sellers in NC may notice that adequate appraisal and financing are not a contingency part of the Offer to Purchase and Contract form as it is in other states. Both the property appraisal and mortgage financing are naturally still part of the purchase process, but loan approval needs to be completed within the due diligence period, or any extension thereof. Otherwise, the buyer runs the risk of forfeiting the earnest money deposit if s/he does not proceed to close on the purchase.
Contingency Addendum and Due Diligence Process
If you are in a position of needing or wanting to sell a house or property prior to completing a purchase of another house or property your agent will need to prepare a Contingent Sale addendum to be submitted along with the Offer to Purchase. This contingency addendum will likely parallel the DDP timeline, but there should be adequate time to either extend the DDP or cancel the Offer to Purchase contract if the sale contingency is not satisfied prior to the expiration of the DDP and there is a buyer doubt that s/he will be able to close. Absent this addendum, a buyer’s earnest money will likely be forfeited if the sale contingency is not met prior to the expiration of the DDP and the buyer does not close.
As stated above, the NC due diligence period is a negotiated duration of time that the buyer has to determine whether or not to proceed with a purchase. As with all negotiations, there can be a fee, payable to the seller, associated with the due diligence period. Bear in mind that during the due diligence period the buyer may walk away from the property for any or no specific reason and receive back all earnest money submitted with the offer. In return for this flexibility to walk away even weeks into the DDP a [negotiable] non-refundable due diligence fee may be required by the seller. If the buyer decides to purchase the home, the due diligence fee is credited to the buyer’s side of the HUD-1 statement at the closing. If the the buyer does not close the due diligence fee is forfeited to the seller.
Note that the seller incurs a loss of market time while the buyer is exercising due diligence. In other words, the home is substantially ‘off the market’. Some may debate that the home is ‘off the market’ but in actuality most buyers do not go to see a property that is in ‘under contract’ status unless they are interested in presenting a back up offer. In a slow (i.e. buyer’s) market the ‘opportunity cost’ to the seller of removing the home from the market may be low; however, in a hot (i.e. seller’s) market the ‘opportunity cost’ may be significant, especially if the buyer walks away from the purchase during the latter days of the due diligence period. Given that most due diligence periods will typically range from 30-50 days, there could be a substantial period of time that the seller is not able to enter a more advantageous contract. Hence, the fee charged to the buyer.
If, at any point prior to the expiration of the due diligence period, the buyer decides to not purchase the property, the buyer shall notify his/her buyer’s agent who will then notify the listing agent that the buyer is exercising the right to terminate the contract. A buyer termination of offer form is used to formalize the withdrawal. This is a unilateral decision that the buyer(s) make(s). No one else has any say at all in the matter. All earnest money shall be refunded to the buyer and that’s that. The process is the same for buyers and sellers operating with a dual agent (i.e. the agent represents both parties) although my recommendation is that the buyer should obtain written confirmation from the agent that his/her [buyer’s] option to terminate was presented to the seller prior to the expiration of the due diligence period. My recommendation is to make and execute decisions well in advance of deadlines.
Don’t Confuse Due Diligence Fee and Earnest Money
It is important to not confuse Due Diligence Fee with Earnest Money Deposit. The due diligence fee has been discussed above. The earnest money deposit is generally submitted along with the contract (or at a subsequent time as dictated in the offer to purchase) to demonstrate a buyer’s sincere interest in seriously pursuing the purchase of the property. If the purchase contract is ratified (i.e. signed by all parties) the earnest money is held in an escrow/trust account (either with the buyer’s agent’s firm, the seller’s agent’s firm or a NC licensed attorney’s trust account). Earnest money is typically applied to the buyer’s cost of closing or returned/credited to the buyer at closing if the mortgage loan along with seller contributions cover all the costs of the purchase.
MAJOR POINT: If you decide, AFTER the due diligence period expires, to not pursue a purchase of a home and do not proceed to closing on the purchase of the property for ANY reason, you are NOT entitled to receive your earnest money back. However, the seller(s) may return the money to you if s/he/they are so inclined after hearing of your circumstance. Do not expect the seller to return earnest money if you cannot or decide to not proceed to complete the transaction after the Due Diligence period expires.
Robert P. Davis, NC/SC Advisor – Realtor®
RPD Realty – Charlotte | Engel & Volkers® South Charlotte