October 25, 2016

Hatteras Island Real Estate: Due Diligence in Contracts


The 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 Period.

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.

(Tom 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.)

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