real estate market is constantly changing, and the forms that are used
to document the terms and conditions of a real estate transaction
change as well.
While most of these modifications are basically administrative, every
now and then a substantive revision takes place. If you haven’t bought
or sold property recently, then it is important to be aware of contract
modifications that can have a meaningful impact for you. One such
change is the inclusion of Due Diligence provisions in the contract.
About five years ago, the North Carolina Offer to Purchase and Contract
standard form was amended to include something known as a Due Diligence
provision. In its simplest form, this provision gives buyers a certain
amount of time, known as the Due Diligence Period, during which they
can investigate any and all aspects of a property to decide whether, in
the buyer’s sole discretion, they will proceed with or terminate the
transaction. While the length of the Due Diligence Period is
negotiable, 30 days is a commonly used time frame.
These are some of the items that are suggested that the buyer should consider investigating during the Due Diligence Period:
- Qualification for and approval of a loan
- Home inspection
- Review of documents like restrictive covenants and homeowner association bylaws
- Insurance availability and cost
- Appraisal of the property
- Survey of the property
- Zoning and government regulations
- Flood hazard
- Utilities and access to the property
- Streets and roads to determine if they are state or privately maintained
- Fuel tanks that may be located on the property.
Here is the part that buyer’s love and about which sellers are less
than enthusiastic. During the Due Diligence Period, the buyer has
a unilateral right to terminate the contract for any reason or for no
reason at all as long as they notify the seller in writing of their
decision to terminate before the expiration of the Due Diligence
The Due Diligence Period may be extended by mutual agreement, but the
seller is not obligated to grant an extension. If the buyer notifies
the seller in a prescribed manner that they intend to terminate the
contract, then, barring some unusual circumstance, the buyer is
entitled to a refund of his or her earnest money deposit.
If, during the Due Diligence Period, the buyer discovers some aspects
of the property that need repair or generate concern, the buyer may
then submit a request to the seller to have those items addressed.
Buyers and sellers may, but are not required to, engage in negotiations
for repairs or improvements to the property.
At this point, you may be wondering if there is any part of the Due
Diligence story that benefits the seller. The answer is a qualified
“yes.” The contract contains a provision for a Due Diligence fee that
is paid to the seller at the time the contract is finalized. This fee
is intended to compensate the seller for the buyer’s right to conduct
Due Diligence investigations during the Due Diligence Period. The fee
is negotiable, and it is not required. If the transaction closes, it
becomes a credit to the buyer.
The Due Diligence fee is non-refundable to the buyer unless the seller
breaches the contract or if the seller fails to complete any of his or
her obligations as outlined in the contract. The qualifying comment
concerning the Due Diligence Fee is that it is not a usual and
customary practice to include the fee in the majority of real estate
contracts on Hatteras Island.
When you buy or sell property on Hatteras Island, your real estate
agent should review the Due Diligence aspects of the contract with you.
In the end, Due Diligence is not inherently good or bad. It is,
however, definitely a provision of the contract which you should be
aware of and which you should understand.
Hranicka is a broker with Outer Beaches Realty. Questions, comments, or
suggestions for future articles may be sent to Hranicka at P.O. Box
280, Avon, NC 27915 or emailed to [email protected]. Copyright © 2015 Tom & Louise Hranicka. All rights reserved.)