What Is a Due Diligence Fee—and Is It Necessary To Buy a House?

A couple in North Carolina recently shared their due diligence disaster on Reddit, and it’s gaining a lot of attention.

They found their dream house, paid $3,000 in earnest money, and promptly mailed $7,000 in due diligence fees to the seller.

However, things didn’t go according to plan. As they try to figure out their next move, we’ll explain how due diligence money can be a helpful tool that clearly comes with a risk.

What is a due diligence fee or due diligence money?

A due diligence fee is a nonrefundable payment to the seller in return for accepting a buyer’s offer and taking the property off the market while inspections are done.

The fee is meant to show the buyer’s dedication to purchasing the property, and a due diligence period is established, allowing the buyer to cancel the deal for any reason within that timeframe.

Due diligence fees vary, are nonrefundable, and are only common in certain states and markets.

They are most typically used in real estate transactions in North Carolina and South Carolina.

In Texas, a similar concept exists under the term “option fees,” which function in the same way.

“In Texas, your due diligence fee is called an option fee. You are essentially buying the option to walk away for any reason during X amount of days, without your earnest money being in jeopardy,” says Paige Elliott, of Elliott & Elliott Real Estate Group in Dallas, TX. “Your option fee is not given directly to the seller here—instead, it’s required to be deposited with the title company.”

In the case of the couple on Reddit, they mailed their due diligence fee directly to the seller; but the cashier’s check was allegedly stolen out of the mailbox and cashed by a fraudster, which now puts them in a precarious situation.

What is the difference between due diligence and earnest money?

Due diligence and earnest money are both deposits made by a buyer in a real estate transaction, but they serve different purposes.

Earnest money

Earnest money is a deposit made by the buyer to show their intent to purchase the property; but it is typically refundable if the buyer backs out of the deal for a reason covered by the contract, such as during an inspection or in the appraisal contingency period.

However, if the buyer terminates the contract outside of those contingencies, the earnest money may be forfeited to the seller.

Earnest money is usually held in escrow until closing and is applied toward the buyer’s down payment or closing costs if the deal goes through.

Due diligence money

Due diligence money is a fee paid by the buyer to secure the right to inspect, appraise, and evaluate the property during the due diligence period.

It shows the buyer’s commitment while allowing them to back out of the deal without penalty during the due diligence period for any reason.

Due diligence money is nonrefundable, regardless of whether the buyer decides to proceed with the purchase—and is typically not applied to the purchase price or closing costs.

In Texas, however, option fees are usually applied to closing costs.

Main differences

Earnest money can be refundable (under certain conditions), while due diligence money and option fees are non-refundable.

Earnest money and option fees are usually held in escrow until closing, while due diligence fees are paid directly to the seller.

Earnest money is a common practice in real estate transactions across the United States—typically used in every state—while due diligence fees are common only in North Carolina and South Carolina, and option fees are typical only in Texas.

In North Carolina and South Carolina, buyers pay both earnest fees and due diligence fees, like the couple who posted on Reddit did.

In Texas, buyers pay both earnest fees and option fees.

The benefits of having both payments in the mix are that up until the due diligence date (usually between two weeks and a month from the date the contract is signed), the buyer can walk for any reason—including changing their mind or getting cold feet—and will only lose their due diligence money.

But the downside is that due diligence fees are always nonrefundable—and they’re not applied to the purchase price or closing costs, even if you end up going through with the deal, according to Cara Ameer, a real estate agent with Coldwell Banker.

How much due diligence money should you offer?

How much due diligence money you offer should be “the least amount the seller will accept,” according to real estate attorney Eric Teusink, managing partner at Williams Teusink in Atlanta.

“This amount would be recommended by your real estate agent, who will best understand market norms,” he says.

There are typically customary pricing guidelines associated with how much due diligence money you should offer—and “that’s dictated by the price point of the home,” says Ameer.

Buyers typically pay anywhere between .5% to 5% of the purchase price in due diligence money, depending on how competitive the market is.

For the couple on Reddit, the home they were interested in was listed at $295,000, so their $7,000 due diligence fee amounted to 2.37% of the purchase price.

Does the due diligence go toward the down payment or closing costs?

Earnest money applies to the purchase price or closing costs; option fees apply to the closing costs; and due diligence money is not applied to the purchase price or closing costs.

Since the cashier’s check from the couple on Reddit was stolen, they now want to back out of the deal but will have to pay the seller $7,000 in nonrefundable due diligence fees to do so.

Ameer says their situation should serve as a cautionary tale to other would-be homebuyers.

“Due diligence money should always be wired and never put in a check left in any type of mailbox or in an office where it could be stolen,” she warns.