When buying a house in North Carolina your REALTOR will guide you through the process…and it is quite a detailed process. The Offer to Purchase and Contract (OTP) is 12 pages long and it can be pretty intimidating just reading through all of the language used. There could also be certain addenda attached to the offer making it more confusing, but in general, there are 7 important pieces to consider…. they are;
*Amount of Due Diligence Fee
*Amount of Earnest Money
*Due Diligence Period
*Seller Paid Closing Costs
*Personal Property Included/Home Warranty
Though each of these points of interest could have their own Blog Post and it is very important to discuss each one in detail as each depends on several factors such as the current market, comparables, multiple offers, etc., there is one item that in my opinion is the most important….the Due Diligence Period.
The Offer to Purchase and Contract in North Carolina changed several years ago to incorporate a period of time for the buyer to address any issues or circumstances that could affect the purchase of the property. These include inspections, review of covenants and other documents, insurance, a survey and any other items the buyer would like to investigate. The one item I find to have the most trouble with is the appraisal. The problem I find is not necessarily having the property hit the value that is stated in the contract, but it is the matter of getting that appraisal done in time and by “in time” I mean by the due diligence date.
The appraisal is the one item that your REALTOR has no control over. We can get inspections done, supply documents such as covenants, remind you to talk to an insurance agent…., but we do not and cannot order the appraisal…that is done by your lender. When applying for a loan make sure your loan officer has all of the necessary documentation signed so they can order the appraisal. There have been several times that a loan officer has called me a day or so before the due diligence date and asked me to extend due diligence. It is NOT that simple. The seller doesn’t have to honor this request at all. I have even had someone tell me the appraisal is not a part of the due diligence process. This is certainly not true as it is a noted item under the due diligence paragraph in the OTP……paragraph 4 (b)(v).
Only a licensed attorney can give you legal advice, but if you read the verbiage in the OTP, it states in a nutshell, that the buyer pays a due diligence fee directly to the seller. The earnest money is written to the escrow agent which will be put into a Trust Account. If the buyer backs out for any reason BEFORE the due diligence date, then they shall be entitled to receive their earnest money back, but will not receive their due diligence fee, the seller keeps this fee. If the buyer backs out AFTER the due diligence date then they forfeit their earnest money as well as the due diligence fee. Keep in mind that the buyer has most likely already paid certain fees such as a home inspection, applied for loan, paid for the appraisal and other miscellaneous fees. If the buyer closes on the property the due diligence fee and the earnest money is credited back to them at settlement. There could be different situations arising which could contradict this such as a survey revealing encroachments or a cloud on title, but that is where a licensed attorney steps in to consult their client.
Just to give a scenario, let’s say a buyer writes an offer on 3-1-16 with a due diligence date of 3-22-16 and a settlement date of 4-15-16. This gives the lender 45 days to close the loan, but gives the buyer essentially three weeks to have all inspections done, any investigations they feel necessary and most importantly the appraisal COMPLETED. If it gets to 3-20-16 and the appraisal has not even been ordered, the water is getting hot. The appraisal should be in a fews days (minimum) before the due diligence date in case the house does not hit value and re-negotiating is needed. So on 3-20-16 your REALTOR tells you we need to extend due diligence because the appraisal hasn’t come in yet, we can ask the seller to extend, but if they don’t…as they don’t have to, then there is a tough choice to make. Either cross your fingers that the house appraises or back out. It’s a huge gamble that no one wants to take. IF you move forward and the home appraises, great…move on and close. But, if the house doesn’t appraise you are out some money and that amount of money depends on the appraisal itself and also depends on the amount of earnest money and due diligence money invested in the deal.
One caveat especially with a hot market as we have now is with multiple offers every one of these items mentioned above..price, dd date, earnest money etc., matter. So listing agents are trying to ask for shorter due diligence periods. Stick to your guns on at least a three week period for due diligence UNLESS your lender guarantees you in writing (which they probably can’t) that the appraisal will be in by that negotiated date. As always, I suggest you have an in depth conversation with your REALTOR before writing an offer….or accepting an offer if you are selling.
By Stu Barnes