Some brokers advise their buyer clients to offer large due diligence fees in order to make their offer more competitive, and some purchasers do so even despite their broker's recommendation.
Even if the inspection reveals major flaws in the property, due diligence expenses are usually non-refundable. The Due Diligence Period is intended to provide the buyer the opportunity to inspect the property and decide whether they want to accept it in its existing state. One of a broker's best practices is to be well-versed in contract terms and to educate their customer on all of the dangers involved, as well as when a due diligence fee is refundable.
When is the buyer owed a refund?
According to form 2-T, the buyer is only may be owed a refund of the due diligence fee if the seller breaches the contract. The contract can be breached by the seller in the following ways:
The seller is unable to provide evidence of clear title and a General Warranty Deed and payoff of all existing liens with an affidavit regarding payment.
The seller fails to pay ad valorem taxes, pro-rated property taxes and any late listing fees, confirmed special assessments, Owner’s Association fees and certain charges payable by the seller, and any agreed-upon buyer’s expenses.
The seller fails to provide access to the property for the buyer including working utilities.
The seller fails to remove their personal property, garbage, and debris.
The seller fails to perform all repairs that have already been negotiated and agreed upon by the parties.
What about when known defects are not disclosed on the Residental Property and Owners' Association Disclosure Statement (RPOADS)?
The property's condition is not guaranteed by the RPOADS. A seller's response of "no" or "no representation" on the disclosure statement does not imply that the property is free of faults or flaws; rather, it indicates that the seller is either uninformed of a problem or has decided not to make a representation. Broker's should inform their clients that North Carolina is a caveat emptor or "buyer beware" State and that any due diligence fee paid will likely not be refunded.
What's the most you've seen offered as a due diligence fee? Let us know in the comments below or share with a colleague in one of our upcoming CE Classes!
“But the Seller Breached! When Should Due Diligence Fees Be Refunded?” NCREC Bulletins, 31 Jan. 2022.