Do You Get Your Due Diligence Money Back?

Due diligence money in real estate is a payment made by a prospective buyer directly to the seller. It grants the buyer a specific timeframe, known as the due diligence period, to investigate the property’s condition and suitability. This fee compensates the seller for removing their property from the market during this investigative window.

Role of Due Diligence Money in Real Estate Contracts

Due diligence money is an upfront payment from the buyer to the seller, separate from any earnest money deposit. This fee secures the buyer’s exclusive right to investigate the property without the seller entertaining other offers. During this period, which commonly ranges from 7 to 30 days, the buyer undertakes various assessments. These include home inspections, appraisals, title searches, and reviews of homeowner association documents.

The payment compensates the seller for taking the property off the market. If a buyer decides not to proceed, the seller could have missed out on other interested parties. This payment allows the buyer the contractual right to terminate the agreement for any reason during the specified due diligence period.

Circumstances for Refund or Retention

Due diligence money is generally considered non-refundable, serving its purpose as compensation to the seller for the agreed-upon period the property is off the market. The most common scenario where this money is retained by the seller is when the buyer chooses to terminate the contract during the due diligence period, regardless of the reason. This includes situations where inspections reveal issues, or the buyer simply changes their mind. Even if a home inspection uncovers significant problems, the buyer typically forfeits the due diligence money if they decide to walk away.

Conversely, there are very limited circumstances under which a buyer might receive a refund of their due diligence money. This typically occurs if the seller materially breaches the contract, meaning they fail to fulfill a significant obligation outlined in the purchase agreement. Examples could include the seller failing to provide a clear title or if the property is destroyed or significantly damaged before closing, making it impossible for the seller to deliver the agreed-upon property. Such instances are uncommon, and the specific conditions for a refund due to seller default are usually detailed within the contractual agreement.

Final Disposition of Funds

If a real estate transaction proceeds to a successful closing, the due diligence money paid by the buyer is typically credited towards the overall purchase price of the home. This means the amount paid upfront is applied to the buyer’s closing costs or down payment, effectively reducing the remaining sum owed at the completion of the sale. It becomes a part of the buyer’s equity in the property.

However, if the transaction does not close and the seller retains the due diligence money, it serves as compensation to the seller. This payment is for the time the property was off the market and any potential lost opportunities to sell to another buyer. The seller keeps this amount as a direct payment, recognizing their commitment and the buyer’s exclusive right to evaluate the property during the agreed-upon period.