Earnest Money Vs. Due Diligence: What’s The Difference?

When you're in the midst of the home buying process, you rely on various individuals to walk you guide you, such as your real estate agent or REALTOR®. For example, you may wonder about earnest money versus due diligence fees (or other fees) you may pay when buying a house.

So, what is due diligence money versus earnest money, and do you have to pay it during a real estate transaction? Let's find out.

What Is Earnest Money In Real Estate?

Earnest money in real estate, also called a "good faith deposit," refers to an amount a prospective home buyer puts down to show their commitment to buying a house. The money goes into an escrow account, a special account that holds money until the purchase agreement goes through. At that point, it goes back to the buyer at closing and applies toward the sales price.

Earnest money deposits usually range from approximately 1% – 3% of the home purchase price and go toward a buyer's down payment or closing costs.

Earnest money protects the seller if the buyer backs out of the sale – in this case, the seller can keep the money if the buyer backs out. However, if the deal falls through because of a failed home inspection or other contingencies in the contract, the buyer would get their earnest money back.

What Is A Real Estate Due Diligence Fee?

A due diligence fee is a nonrefundable fee paid by the buyer to the home seller. This fee buys the prospective buyer time to perform “due diligence” checks on the home, like an inspection. The fee is negotiable but can range from $500 – $2,000, depending on how high the buyer is willing to go to secure the sale.

Understanding The Due Diligence Period

A due diligence period in real estate is the time between an accepted offer and closing. During this time, the buyer and the seller agree to allow the buyer to inspect the home before closing on the sale to uncover any unfavorable information about the property.

For example, physical investigations can occur, such as a home inspection, home appraisal, title search, land survey, disclosures, homeowners association (HOA) rules, zoning rules and insurance.

Where Due Diligence Fees Are Common

Due diligence laws vary from state to state, but due diligence fees are not always common. Check with your real estate agent regarding the legal applications that affect you. Due diligence fees typically occur in states like North Carolina, California, Texas and Ohio. The fee amount depends on a few factors, such as:

• The real estate markets
• Number of days on the market
• Buyer/seller circumstances
• Length of due diligence period

Due Diligence Money Vs. Earnest Money At-A-Glance

FAQs: Earnest Money Vs. Due Diligence

Still have questions about what is earnest money versus due diligence? Let's walk through a few lingering questions you may have.

Do I pay my earnest money or due diligence money first?

If you live in an area where earnest money and real estate due diligence fees are commonplace, once you deposit the earnest money, the seller usually takes the property off the market while the buyer does due diligence. The buyer typically pays the due diligence fee during that due diligence period, which occurs separately from the earnest money deposit.

Why is earnest money and due diligence money important in real estate?

Earnest money is important because it helps demonstrate the buyer's interest and seriousness in purchasing the property. Due diligence, on the other hand, ensures that all processes move smoothly toward meeting each expectation of the home purchase.

What is the average due diligence fee in real estate?

The Bottom Line