You’ve probably heard the term “Earnest Money” , and possibly heard of a due diligence fee. But maybe you’re not sure what the terms mean or who/ what the money goes to. I’m going to clear that up for you right quick.
The difference between earnest money and the due diligence fee is significant. Although they are both negotiable terms of an Offer to Purchase, they each have a different purpose and the checks are made out to different parties.
Earnest money is like good faith money. It’s an amount that generally shows a seller how serious a buyer is about purchasing the property. The amount is usually between 1 to 5 percent of the purchase price of the home and the check is made out to the closing attorney. It’s held in the attorney’s non-interest bearing trust account and goes towards your purchase price at closing. Should the buyer back out of the contract during the due diligence period, he or she will typically will get the earnest money back. If for some reason, the buyer backs out of the contract after the due diligence period, it’s less likely that he or she will get earnest money back.
Due diligence, on the other hand, is money that goes directly to the seller. The buyer is basically paying the seller a small fee for a certain amount of time to take the property off the market so that he or she can investigate it. It does go towards the purchase price, but the buyer will not get it back should they change their mind and walk away, even if it’s during the due diligence process. It’s a negotiable amount, but is beginning to carry more weight than it has in the past, because it shows how much the buyer is actually willing to risk.
Both the due diligence fee and the earnest money are out of pocket expenses and are submitted with the offer (or within 5 days); however, they are both applied to the purchase price at closing. Hoping this clarified for you the differences between earnest money and the due diligence fee. Feel free to contact me with questions!