Buyer Basics: Part 6 - Due Diligence
Defined, caveat emptor is the principle that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made. North Carolina is a caveat emptor state. Simply put, North Carolina is a buyer beware state. Home purchasers in North Carolina also adhere to the buyer beware premise.
When buying a home, since North Carolina is a caveat emptor state, there are only three things a seller must disclose about their home. First, the seller must inform the buyer whether the home was built prior to 1978. If the home was built prior to 1978, then the seller is required to disclose if he or she knows of the presence of lead-based paint. Next, a seller is required to notify the buyer of a Home Owner’s Association, its dues, and its responsibilities. Lastly, the seller is required to update the purchaser of the property’s oil, gas, and mineral rights status. From a buyer’s perspective, that is very little information a seller needs to pass along. What if there are problems with the foundation? Will the seller fix that cracked window? What is that dark spot on the ceiling?
Part of a buyer’s negotiations will include a due diligence period and an earnest money deposit. Since there is very little information that a seller must provide a seller, the standard contract in a real estate transaction gives the buyer a chance to inspect the home. A due diligence period is the buyer’s chance to fully investigate the property. Tyre Realty Group suggests having a home, HVAC (heating and air conditioning), and wood-destroying insect inspections completed. With these inspections, a buyer should have a very clear idea of the home.
With these inspection reports in hand, the buyer’s agent can negotiate certain repairs that the buyer feels the seller should complete. It is integral to have the inspection reports to create leverage during the negotiations. If a buyer asks for a new HVAC unit, but there is no evidence to support it, how likely will the seller be willing to spend a couple of thousand dollars on a new unit if the home does not need it?
When a seller accepts an offer with a due diligence period, a due diligence fee is a compensation for the seller to take his or her home off the active market to allow the buyer the time needed for their inspection(s). Most listing agents will ask for a due diligence fee. This fee is the compensation for the seller to take their home off the market. The due diligence fee ranges from region to region. We recommend consulting with your agent when negotiating the due diligence fee.
Also, there is not a standard time frame for a due diligence period. Your buyer’s agent should be aware of how far in advance the inspector(s) will need to be scheduled, how long it will take for the inspection report(s) to be received, and factor in how long the negotiations might take. For instance, if the inspectors are a week out from being able to complete the inspection, and it takes forty-eight hours to receive the reports, the buyer will need at least two weeks. But what if the seller needs to time to quote the cost of the repairs? The buyer’s REALTOR® will also need to factor that into the equation. For buyers, it is important to realize that the longer the due diligence period, the more in a due diligence fee the seller may want.
While repairs can be still negotiated outside of the due diligence period, the seller knows that if he or she does not agree to the repairs, and the buyer decides to terminate the contract, then the buyer will not only lose their due diligence period but will also forfeit their due diligence money. The buyer loses leverage for these repairs if the negotiations for the repairs continue outside of the due diligence period. If the buyer decides to continue with the transaction, then the buyer will receive a credit for that due diligence fee.
At Tyre Realty Group, our buyer’s agents are trained rigorously on negotiating the due diligence fee, the due diligence period, and the repairs. From a buyer’s perspective, even though he or she might have the home under contract, the due diligence period might be the most important part, since there is money that could be lost. All potential buyers should be asking their prospective agent about the due diligence process. If you would like to schedule a free consultation with one of our buyer’s agents, feel free to call us at (252) 758-4663 or stop by our office at 505 Red Banks Road Suite E.