So you’ve spent weeks working with your Real Estate Broker to find the perfect home, the sellers have accepted your offer, and now you’re under contract!
Or perhaps you’re on the other side of the deal: Your Broker has found a buyer for your home, you’ve agreed on the terms, signed the contract, and closing is scheduled in thirty days.
This article will help you understand what happens during the contract period, and your rights and responsibilities during that period.
The contract you signed (either as a buyer or seller) is exactly what it says – a legally binding CONTRACT. In North Carolina the form most often used is the “Offer to Purchase and Contract” (Form No. 2-T).
The Offer to Purchase and Contract is a bilateral contract, meaning that two parties have promised to perform a specific act in exchange for a specific consideration (usually money). The contract spells out both the rights and responsibilities for both parties, the buyer and the seller.
What Did I Agree To?
If you’re the seller, you agreed to transfer clear title to your property to the buyer, within a specific period of time, for a specific amount of money.
If you’re the seller, you agreed to purchase said property, within a specific period of time, for a specific amount of money.
Sounds simple enough, right? But you’re not done yet, as there are some things that need to happen during that time.
The Due Diligence Period
Most contracts include what’s called a Due Diligence period, usually spanning two to three weeks, which gives the buyer time to inspect the property for problems and defects and also to secure financing.
Important: In North Carolina, the buyer has the right to terminate the sales contract during the due diligence period for any reason, or for no reason, and receive a refund of the earnest money deposit.
Given that the due diligence period is the buyers “grace period,” two very important things need to happen during this period: Inspections and loan approval.
Inspections & Repairs
As a buyer, you want to ensure all of the systems in your new home function properly, and that there are no hidden problems or issues. Therefore, it’s imperative to hire a professional inspector to inspect the property (your Broker can help you find a reputable inspector).
The seller’s responsibility is to allow the buyer reasonable access to the property in order to conduct the inspections.
If there are problems found by the inspector (and don’t be surprised, every home will have some issues), the inspector will note them in the inspection report, which will be given to the buyer.
Most homes will have minor issues, and it’s not uncommon to negotiate the repair of more major issues with the seller. Your Real Estate Broker will walk you through the process of negotiating the repair agreement.
The “Repair Agreement,” called the “Due Diligence Request and Agreement Form,” is used to request repairs from the seller. Keep in mind that the seller is not required to make any repairs to the property, however, most sellers will respond to reasonable repair requests.
The repairs can be done by the seller, or the seller can offer the buyer a credit at closing to cover the cost of the repairs.
IMPORTANT: If there are major problems that would affect your decision to purchase, you want to find them during the due diligence period so you have the option of terminating the contract.
What happens if the seller hides a serious problem with the home?
North Carolina is a “caveat emptor” (“buyer beware”) state, which means that the seller is not legally bound to disclose any information about the property to the buyer — which is why it’s so important to have a proper inspection done on the property, and pay for a survey which would identify any encroachments on the property.
However, that rule does not apply to the Real Estate Brokers that are involved in the transaction. Per North Carolina law, Real Estate Brokers have a fiduciary duty to disclose any information that may affect a buyer or seller’s decision in a property transaction.
For example, if a seller’s agent discovers that their client’s home has significant foundation problems, that agent is required to disclose that information to any potential buyer (known as a “material fact”), regardless of whether the seller wants them to or not.
The same goes for the buyers’ agent, who is also required by law to disclose any information they learn of that might affect their client’s decision to purchase a property.
Any Broker who willfully or negligently fails to disclose a material fact is subject to disciplinary action by the NC Real Estate Commission and can be sued for damages by the aggrieved party.
What happens if the seller makes it difficult to get access to the home for inspections?
As noted earlier, the Offer to Purchase and Contract binds the seller to allow reasonable access to the buyer in order to inspect the property. So if reasonable access is not granted, the seller would be in breach of the contract, which would allow the buyer to void the contract. A buyer should consult with their real estate attorney on how to proceed in this type of situation.
Securing Your Financing
The second important task during the due diligence period is for your lender to ensure that your loan obtains final approval. You probably received a “pre-approval” from your lender, but that is not the same as final approval. You want FINAL APPROVAL, and the seller’s Broker will most likely want confirmation that is has happened!
During the due diligence period, your lender will request specific documents from you, and it’s important that you provide them as quickly as possible, otherwise, your loan approval could be delayed.
If you encounter a problem with your financing during the due diligence period, you still have the option of terminating the contract and getting a refund of your earnest money.
However, once the due diligence ends, the buyer is bound by contract to move forward with the sale. Terminating the contract after the due diligence period expires will cause you to lose not only your due diligence fee but also your earnest money deposit.
The Earnest Money Deposit & Due Diligence Fee
When you submitted your offer to purchase, you most likely included an earnest money check and a due diligence fee check along with your offer.
What is that money for, and what happens to it?
Once a contract has been accepted and communicated, the earnest money is placed into an escrow account controlled either by the selling broker, the buying broker, or the settlement attorney, where it will be held until the settlement date. The Due Diligence Fee is given to the seller to deposit in their bank account.
Earnest money is a deposit given to a seller indicating the buyer’s good faith in a transaction. Depending on the amount of the sale, the earnest money can range from $1000 to $5000, even higher in some instances.
The earnest money deposit is also a protection for the seller, in that if the buyer fails to perform what was promised in the contract, I.E. purchase the home, the earnest money becomes liquidated damages awarded to the seller to compensate them for taking the home off the market.
The Due Diligence Fee
The due diligence fee is given to the seller as compensation for taking the property off the market while the buyer conducts the inspections.
IMPORTANT: If the buyer decides to terminate the contract during the due diligence period, the buyer is refunded the earnest money deposit, but the seller gets to keep the due diligence fee. If the buyer backs out after the due diligence period, the seller gets to keep the earnest money and the due diligence fee.
At settlement, both the earnest money and the due diligence fee will be a credit back to the buyer towards the purchase of the property.
What happens if the seller backs out?
We’ve talked a lot about the buyer backing out, but what happens if the seller changes their mind about selling the property?
In North Carolina, a seller who breaches, or fails to perform what was promised in the contract, a property sale contract can be sued for what’s known as “specific performance.”
That means the buyer could take the seller to court, and if the judge rules in favor of the buyer, the seller could be compelled to complete the transaction. In other words, the court can force the sale to go through according to the terms of the original contract. This is another situation where a buyer would need to consult with their attorney on how to proceed.
As you can see, there are many important aspects in a real estate transaction, and for good reason: Not only is a home purchase probably the largest financial investment you’ll make in your lifetime, there are also a number of rights and responsibilities involved for both the buyer and seller.
That’s why it’s important to have a team of skilled professionals to assist you with your real estate transaction. If you thinking of buying or selling a property, I would be honored to work with you to represent your interests and ensure your transaction is successful.
Clay & Tammy Ritter
Hope Street Realty