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July 21, 2022

What is Due Diligence in North Carolina?

By

Tim Clarke

What is Due Diligence in North Carolina?

In North Carolina, the due diligence process is designed for the buyer to perform a series of activities to uncover all defects and encumbrances to determine the functional and financial feasibility of a property before signing at the closing table. In this current market climate, the due diligence fee and date within an offer to purchase vary based upon the attractiveness of the property and the condition of the house.

An appraisal, home inspection, radon, mold, termite, septic (if applicable) and well inspections (if applicable) are common elements within any due diligence timeframe. Circumstances with titles and surveys aren't typically associated with the due diligence process. Title searches and surveys are most commonly done by real estate attorneys in North Carolina at the expense of the buyer.

This article explains some of the common facets that should be included in your due diligence process as well as tips on how to best carry them out.

The Purpose of Due Diligence in a Contract

Due diligence is broken up into two facets; a "fee" and "date" and both are outlined as terms in a North Carolina Offer to Purchase. The purpose of the due diligence fee and date is loosely defined as a block of time purchased by the buyer. The fee is nonrefundable and paid directly to the seller. Within the due diligence block of time, the buyer completes the discovery process of identifying any defects or encumbrances to the property being purchased.

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Although North Carolina real estate purchase agreements define properties as being sold "as-is", it is very common for the buyer and seller to negotiate discovered encumbrances within the due diligence period. The seller has the prerogative to accept or deny any repair requests and if repairs are denied, sellers can offer cash "in lieu of" repairs, which becomes a credit to the buyer at closing. If the seller denies any request from the buyer, the buyer has full right to terminate the contract with a full refund of earnest money. If both parties come to an agreement after the buyer's discovery efforts before the expiration of the due diligence date, the buyer typically moves forward with the purchase.

Different from the discovery process only held by earnest money, the buyer doesn't need a legal nor rational reason to terminate if the termination occurs before the expiration of the due diligence date. If the buyer chooses to terminate within the due diligence period, the due diligence is lost but the buyer is entitled to a full refund of earnest money.

Let’s look at some of the different ways due diligence in a purchase contract is applied and how it affects both buyer and seller.


The Process of Due Diligence

In a North Carolina real estate purchase contract, the due diligence process is essential. This includes a legal assessment of the property, a physical evaluation of its current condition and a determination of its reasonable fair market value.

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Once a seller accepts an offer and a contract is ratified the clock starts. The purchase agreement outlines what is expected of both parties to being the purchase process. Buyer's agent (via buyer proxy) deploys all necessary inspections and discovery. This can be a complicated process, and many different clauses can affect the transaction.

The due diligence process can also include several opportunities for the buyer to negotiate for additional terms after the previously agreed upon terms that are outlined in the contract.


Due Diligence Before the Offer

Prior to the offer, when the buyer and buyer's agent tour the property, a careful determination of possible defects or other encumbrances should be considered to determine the type of due diligence fee and the date they would like to include in their offer.

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If the listing seems like it will generate multiple offers, the amount offered as the nonrefundable fee and the duration requested for discovery could either strengthen or weaken the buyer's offer. At that point, the buyer must determine if that listing is worth competing over. In any low inventory marketplace, buyer competition is inevitable. It is simple supply and demand. Naturally, an attractive listing in good condition generates multiple offers. When a buyer is touring a home that piques their interest and there is a multiple showing situation, it is highly important for the buyer to not display any emotion nor discuss any anticipated terms of their offer inside the property or in the presence of any other prospective buyers.

Due Diligence After an Offer is Accepted

Once the purchase contract is signed, the parties will begin the due diligence process.

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The buyer will have their real estate agent schedule multiple discovery vendors to perform various comprehensive inspections of the property to uncover hidden defects and other unknown encumbrances. The inspection process allows the buyer to be sure that the property is free of any blemishes that would either deter the buyer from proceeding to closing or prevent the agreement from being legally enforceable.

Typically, it would take a week to get all licensed professionals to investigate the property. If the inspector is highly sought out, then it could be longer than a week for the inspector to visit. If the purchase is being funded by a lender, the loan officer will schedule the appraisal. An appraisal ordered can take up to two weeks, depending on the appraiser's current workload.


Due Diligence Expiration Date

After the inspection process, the buyer will request for repairs or cash "in lieu of" repairs in a Due Diligence Repair Request Form.

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This is the point at which the buyer has enough information to make a decision about the property and regardless of the seller's response of the items in the Due Diligence Repair Request Form (DDRA) the buyer can terminate with before 5:00 pm of the due diligence date outlined in the contract.

If there is no resolution between buyer and seller and the seller fails to terminate before 5:00 pm of the expiration date, the buyer's earnest money is now at risk of being awarded to the seller if the closing doesn't occur. It is paramount that all agreements are in writing before the expiration of due diligence.

At this point, the buyer has enough information to make an informed decision, so they will not need to get more information on the condition of the property. After the due diligence period and if the buyer chooses to move forward, the status of the listing is then changed from "contingent" to pending, which reflects the status of a common transaction involving just earnest money. Be careful not to confuse "contingency clause" with the "contingent" status. The most typical contingency clause is when the buyer has to sell their current home in order to purchase the next home. That offer is a "contingent offer".

Summing Up Due Diligence

The purpose of the due diligence fee and date is loosely defined as a block of time purchased by the buyer.

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Within that block of time, the buyer completes the discovery process of identifying any defects or encumbrances to the property being purchased. Although North Carolina real estate purchase agreements define properties as being sold "as-is", it is very common for the buyer and seller to negotiate discovered encumbrances within the due diligence period.

The seller has the prerogative to accept or deny any repair requests and if repairs are denied, sellers can offer cash in lieu of repairs, which becomes a credit to the buyer at closing. If the seller denies any request from the buyer, the buyer has full right to terminate the contract with a full refund of earnest money.

At closing, both earnest money and due diligence is returned to buyer as a "seller credit". An initially non-refundable fee can be applied to any of the buyer's expenses at closing, including but not limited to, closing costs and the buyer's down payment on the loan.


If you have any questions or concerns regarding your due diligence process, feel free to contact me at ClarkeT@hpw.com or call 919-355-TIMC with any questions you may have.

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