How Much Due Diligence Money Should You Put Down?
The Savvy Synopsis
When buying a home in North Carolina, often it is expected to put down due diligence money with the offer. How much money should you put down? How does this impact the home buying process? We’ll explain due diligence on today’s episode.
If you’re starting to look for a home to buy and wondering how much to put down or what red flags are worth looking at, this is the episode for you. Angie answers two questions from the mailbag all about home buying.
Barb from Chapel Hill just started looking at open houses last weekend but every house had some sort of red flag. How do you know when a possible red flag should prevent you from buying a home? Your realtor should be able to help guide you through some things that are minor vs. major when you look at a home. You can also bring some of these concerns to the seller along with your offer to make sure it gets addressed.
Your home inspection is another opportunity to make sure you know what you’re dealing with. It’s helpful to be educated on what to expect during the inspection ahead of time.
Peter in Clayton wants to know how much to set aside for due diligence and earnest money. While it varies between different markets, Angie says about one percent of purchase price is the norm, unless in a multiple offer situation. While this money will be cashed immediately (so be prepared for that!), it will be credited back to you in your closing costs.
Due diligence money is at risk immediately, so the more you put down, the more you might lose if something goes awry. It shows the seller however that you are serious about buying the home. You’ll want to commit enough due diligence money, but not too much. Work with your realtor to see what amount makes sense and consider possible ways to creatively make an offer on a home in case of a bidding war.
Listen to the full episode or click on the timestamps below to hear this week’s questions from the mailbag.
0:37 - Mailbag: When should red flags on a home stop you from making an offer?
3:42 - Seldom does a deal come apart due to what happened in inspection.
5:08 - Mailbag: How much should you set aside for due diligence and earnest money?
6:17 - If you are in a bidding war, putting more in your due diligence money can help you win the offer.
8:00 - There are creative ways to write the offer and terms to give a delayed due diligence.
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Note: This is an automated transcription. Please forgive the robots as they tend to make some (a lot of) mistakes...
Speaker 1: (00:02)
It's time for the savvy real tour podcast. I'm Walter Storholt alongside Angie Cole, the owner and broker in charge of ACole Realty serving you throughout the triangle, teaching you about the ins and outs when it comes to buying or selling a home. You can find the team online by going to eight Cole realty.com. That's a C O L E [inaudible] dot com or by calling (919) 578-3128. That's (919) 578-3128 and now it's time for one of the top realtors in the triangle, Angie Cole and the savvy real tour podcast. It's time for the mailbag. We want to hear from you.
Speaker 2: (00:42)
Speaker 1: (00:51)
I've got another one here from Barb. As we hop over to chapel Hill, uh, Barb says we're just starting to dip our toe in the housing search waters and stopped in on a few open houses. Last weekend and one house we noticed a moldy moisture type smell in another home. We had a lot of trouble getting any of the windows to open. Seems like every house has little red flags. How do you tell which ones are serious and which ones aren't before you put in an offer?
Speaker 3: (01:17)
Barb, that's a great question. And um, you know, that would be concerns of mine as well. Especially mode molds, not something you play around with, but you know, that's really where your real estate professionals should be stepping in and giving you that guidance. Um, you know, because remember when it comes to buying a home, it is understood per the North Carolina real estate contract that you are buying the home as is. It is a buyer beware state. So it is best that we bring those things to the attention of the seller, make them part of an offer, make sure that those items are taken care of either before making an offer or as part of the agreement just because the last thing that we would want is for you to go under contract, start investing money into purchasing this home only to have all these red flags really come to light.
Speaker 3: (02:03)
And so by having a real estate professional who is savvy, who has been to several, several hubs, sales inspections, uh, is really important. Just to bring those things to light because there's probably a lot of things if you're already, you're noticing those things. There's probably other things or not noticing. You could always get a home inspection up front, but I would also, you know, hate that you would start investing money into a home that you might not even go into contract dog because maybe you, I had this seller do not come to an agreement on pricing. So I don't feel like that's the best route. Uh, but having, again, a real estate professional like Aiko Realty, our team is top notch. We see homes every day. We see inspection, uh, inspection reports every day. And we know what to be able to look out for is really going to be useful and helpful before you decide to make an offer on a home.
Speaker 1: (02:50)
That's a great point, Angie. And I mean, cause some things can look like a red flag, but they're really not a big deal. Like the windows not opening could mean somebody did some painting and they kind of painted the, yeah. Yeah. And
Speaker 3: (03:00)
I honestly, I see that all the time. You just need to take a razor blade to it, cut the window fray, you know, it's just honestly it was a page or being a little bit bassier and it could easily happen just even with paint dripping down. So that's not the end of the world. It could also mean the foundation is shifting. These satellite there could be understand the worry. There could be, but I mean there's, you know, even with brand new homes, they're never going to be perfect. There's always going to be issues, always going to be concerns, but just making sure that you know, they are larger concerns. Bring that to the attention of the seller. Make that part of your offer from the get go. Because once again, they are not required to fix it, you know, and agree to anything. What's your under contract? You know, if they don't fix it for you, they're going to run into the same hiccup probably with the next buyer. So very seldom do we run to a hiccup where deal falls apart because of inspections and we can't come to an agreement.
Speaker 1: (03:50)
Yeah. Usually there's a way to meet halfway or at least partway in one direction or the other to help things come together and complete the sale. Nobody really wants to back out at that point. So, um, it's just good to keep that in mind too bar. But great question. Um, really I think that is a good thing to be thinking about and Barb, something that might be helpful for you is well as you can actually, you know, the home inspection part of the process is an important one and I would recommend getting a little bit more educated about that. Maybe before you continue with your home search or as you continue with your home search cause you do want to make the right choices and know what to be on the lookout for. And, uh, Angie has actually put together a home inspection guide and if you want to check it out, you can text the word inspect to the number five, five five, eight, eight, eight and we'll text you back a link to download the inspection guide and then we'll talk about some of the things that you should be on the lookout for, some of the things that you should be thinking about when it comes to getting your home inspected or if you're a buyer, uh, inspecting that home.
Speaker 1: (04:49)
And even though this usually happens after you make an offer on a home, when you get that home inspection, at least we'll give you maybe a little checklist and a few more things to be aware of as you're looking at some of these homes. What are the big deals, what aren't. So if you want to get that guide right now on your smart phone, you can text the word inspect to the number five, five, five, eight, eight, eight. All right. Angie, one more question for you here comes to us from Peter in Clayton and Peter says, how much should we budget to set aside for due diligence, money and earnest money in today's market?
Speaker 3: (05:18)
Yeah. Um, there's not a one way fits all, but what we've kind of seen as far as being enormous, typically about 1% of the total purchase price. So between due diligence and earnest money, typically 1% of the purchase price has been the norm in our market. And every market's a little bit different. Um, if you're in a multiple offer situation, maybe you need to get a little bit more, uh, firm with those numbers and maybe offer a little bit more. But what we're typically seeing is a total of about 1%. Um, but remember Peter, that although you are hitting those monies over, they will be cashed immediately. Okay. As long as you make it to the closing table, those are credited back to you at closing. So they will go towards your down payment, towards your closing costs, whatever it might be. But you know, you do need to put a little bit of skin in the game when it comes to going under contract because the seller is taking that home off the market for you while you are doing your due diligence, getting your financing and making it to the closing table.
Speaker 1: (06:14)
And I think the other thing too, Angie, and correct me if I'm wrong, but if you are in a really competitive situation or going to be in a competitive situation, you may want to set aside even more for the due diligence and earnest money is it may help you win that bid or when the offer on a home,
Speaker 3: (06:29)
most definitely ms Stephanie, you're 100% correct. And you know, even if it's still like about a 1%, put it more of that 1% towards the due diligence money versus the earnest money. Um, I've oftentimes seen people put all of the money just towards due diligence and no earnest money but still equal and to be about 1% of the purchase price. Uh, the reason why that is more attractive to sellers is due diligence. Money's at risk immediately. So you are showing that you are serious, you are going to make it to the closing table where earnest money is at risk after due diligence expire. So now maybe we have you know, 12 to 21 days or so for you to decide if you truly are going to move forward and make it to the closing table. So giving more money up front as due diligence, which is due at the time of contract, you know, immediately, uh, that is going to show how serious of a buyer that you truly are.
Speaker 1: (07:21)
But back to Barb's question, if you do have some big concerns perhaps about repairs that the house might need, then be careful about committing too much due diligence money that that's sort of seems like the, the advice you guys have,
Speaker 3: (07:34)
it's, I know there is a fine line and it's difficult because you want to be cautious on given too much due diligence. And then what if the years major repairs that come up and the seller's not willing to work with you?
Speaker 1: (07:45)
Yeah, you're locked in, you pay way up front.
Speaker 3: (07:47)
No, it, it, it's, there's not a, there's not a kind of even middle ground either. You know, it's tough when it comes to that, you know, as far as how much you truly love the home versus are we nervous about inspections coming back. So if there are some concerns like Barb mentioned and you are really worried about what this inspection report might look like, be a little bit careful about giving too much due diligence upfront. Another way I've seen it worked is give due diligence at the beginning and say, Hey, we will order inspections by this date once we get a report back. That will give more due diligence immediately. Right after that. Um, same thing goes for a concerned appraisal. Uh, so you can give due diligence, you know, at different times of the contract, you know, before you get to add the additional like earnest or earnest money would be due or you know, at risk.
Speaker 1: (08:35)
So expand on that just, just, just for a moment. So you could do like a medium, uh, somewhere in between a due diligence and an earnest money to do like a delayed due diligence of additional amount after an inspection.
Speaker 3: (08:46)
Sure. Can. Um, I've had, I've had, for example, where, uh, you know, in this market there's copies two listings, right? It is a legally the actual real estate commissioner with Carolina real estate commission. I'm against the, the, you know, rules, a loss at the IX to allow someone in the home. Why it's a coming soon. Um, but I have had instances where several will make a cited seat offer. We'd given very minimal due diligence. You know, I recently had one, I can't disclose exact amounts, but very, very middle minimal, uh, due diligence money upfront. They said we will be able to look at the home within 48 hours after we step foot in the home. Then this amount of due diligence, which was a much more significant amount, is due at five o'clock on that day and now at risk. So, you know, the terms were spectacular. Uh, they worked in the favor of our seller and so they were more than happy to accept that side and seed offer. But you know, we weren't held to, I guess being in contract with them, they can decide they want to quickly back out if the home didn't work for them once they step foot into it because they didn't put much money on the line. So yeah, there are ways to kind of trickle that due diligence money per se to make it work to your advantage.
Speaker 1: (09:57)
You learn something every day after hosting this show with you for years, I thought I'd learned it all, Angie. Yeah.
Speaker 3: (10:01)
Nope. Always. Always need thanks. I'm still learning. You know, I'll tell you what, in real estate, I've been doing this for, you know, 13 years now and there's new situations. There's got, I mean there's, you know, there's different personalities, different people we work with different homes, different locations, and there's something new every day.
Speaker 1: (10:18)
The dynamic always changes, that's for sure. A very neat, great question, Peter. That one sparked some good conversation and helped us learn something new on today's show. So that is very cool. Uh, but since you are asking about due diligence, money and earnest money and those kinds of things might be a great idea for you or anybody else who's beginning that process of buying a home to pick up Angie Kohl's home buying guide. This is a guy that Angie has put together specifically for home buyers in the area. You can access it right now from your smart phone by texting the word contract to the number five five five eight eight eight. Again, just text the word contract to the number five five five eight eight eight what text you back, a link to download. The guide just walks you through some of the important terms, some of the steps, kind of the chronological process of what it looks like to buy a home in North Carolina.
Speaker 1: (11:08)
I know in our area. So it's just a nice helpful guy to have on hand that kinda teaches you about things like due diligence and earnest money that's covered in the guide as well as the rest of the buying process. So if you want to get that at your fingertips, all you have to do is text the word contract to the number five five five eight eight eight one more time. Just text the word contract to the number of five five five eight eight eight you've been listening to the savvy real tour podcast. I'm Walter store Holt alongside Angie Cole. She's the owner and broker in charge of Aiko Realty here in the triangle. And if you have questions for Angie, we invite you to go online to a Cole realty.com listen to past podcast episodes on the website. Read the blog and all the great information, including the option to find a home right there on the website. That's a Cole realty.com and you can also call Angie with your questions. (919) 578-3128.
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