Due Diligence, Earnest Money, and Deposits: What’s the Difference in North Carolina?

If you’re buying a home in North Carolina, you’ll probably hear the terms “earnest money,” “due diligence fee,” and “deposit.” They’re often used interchangeably in casual conversation, but they don’t necessarily mean the same thing.

The due diligence fee is money the buyer pays directly to the seller in exchange for the buyer’s due diligence rights under the contract. In a typical North Carolina residential transaction, the buyer has until the end of the Due Diligence Period to investigate the property, obtain financing, review inspections, and decide whether to move forward with the purchase. During that period, the buyer generally has the contractual right to terminate for any reason or no reason at all.

The important distinction is that the due diligence fee is generally nonrefundable. If the buyer terminates during the Due Diligence Period, the seller ordinarily keeps the fee. If the transaction closes, however, the due diligence fee is credited toward the purchase price.

Earnest money works differently. Rather than being paid directly to the seller, earnest money is typically held in a trust or escrow account by the designated escrow agent. It demonstrates the buyer’s commitment to the transaction, but unlike the due diligence fee, earnest money may be refundable depending on when and why the contract is terminated.

Under the standard North Carolina residential contract, a buyer who properly terminates before the expiration of the Due Diligence Period is generally entitled to the return of the earnest money deposit. After the Due Diligence Period expires, the buyer may risk losing the earnest money if the buyer fails to close and does not have another contractual right to terminate.

So what is a “deposit”?

Usually, it is simply an informal term for money a buyer puts down when entering into a contract. The problem is that “deposit” does not tell you what type of money it is. Someone might say, “The buyer put down a $10,000 deposit,” when they actually mean a $2,500 due diligence fee and a $7,500 earnest money deposit. Those two amounts have very different rules regarding who holds the money and whether it can be refunded.

For that reason, buyers and sellers should pay attention to the actual terminology used in the contract rather than relying on the generic word “deposit.”

As a simple example, suppose a buyer agrees to pay a $3,000 due diligence fee and a $7,000 earnest money deposit. If the buyer properly terminates during the Due Diligence Period, the seller would generally keep the $3,000 due diligence fee, while the $7,000 earnest money deposit would generally be returned to the buyer. If the transaction closes, both amounts are credited toward the buyer’s purchase price.

The easiest way to remember the distinction is this: the due diligence fee is generally paid to the seller and is generally nonrefundable; earnest money is generally held in escrow and may be refundable depending on the contract; and “deposit” is simply a generic term that may refer to either one.

Every transaction is different, and the terms of the actual contract control. If you have questions about earnest money, due diligence fees, or the closing process in North Carolina, a North Carolina real estate attorney can help you understand how those provisions apply to your transaction.