Due Diligence Fee vs. Earnest Money Deposit: What's The Difference?

When writing an Offer To Purchase as a home buyer or reviewing the offer as the home seller in North Carolina and many other states, you will often come across the terms: Due Diligence Fee and Earnest Money Deposit. These common real estate terms represent different parts of an Offer To Purchase and can get mixed up in your mind unless you’re clear on what each one is and how they impact the real estate transaction.

In this article, we’ll explain what the due diligence fee and the earnest money deposit are and give you the information you need to understand each of these terms whether you’re buying or selling a home.

Let’s start with a look at the due diligence fee.

The Due Diligence Fee

The due diligence fee is a non-refundable payment made from the buyer directly to the seller. It represents a financial commitment on the buyer’s side indicating his serious intent to purchase the property. The payment is designed to allow buyers a period of time, usually three to four weeks, called the Due Diligence period, during which the buyer can do inspections on the property, perform a title search, conduct an appraisal and do all the research necessary to ensure the property meets his requirements before finalizing the purchase. Essentially, it's a deposit to compensate the seller for taking the property off the market while the buyer performs his “due diligence” or, in other words, does the thorough research to confirm everything with the property meets the buyer’s standards and expectations.

If the sale goes through to closing, the due diligence fee is applied to the purchase price as an amount paid by the buyer in advance. If the sale is cancelled before closing, the seller keeps the due diligence fee as compensation for the time the property was off the market and to compensate him for the time the seller could have been working with other buyers.

How much should the due diligence fee be?

There is no rule that specifies how much the due diligence fee should be. The fee amount is determined through negotiations between the buyer and the seller. The agreed upon amount can vary widely depending on the local market and the value of the property among other factors specific to each real estate deal.

Buyers usually want the due diligence fee to be lower while sellers want the fee to be higher. Sellers can reject a buyer’s offer to purchase if the due diligence fee the buyer proposes isn’t high enough. Sellers can also miss out on selling their property if they hold out to receive a higher due diligence fee than buyers are willing to pay. A real estate agent is often helpful in finding an acceptable balance and determining the right amount of due diligence money to offer as a buyer or accept as the seller.

Now, with an understanding of the purpose and implications of the due diligence fee, let’s take a look at the Earnest Money Deposit (EMD).

Earnest Money Deposit

Like the due diligence fee, the earnest money deposit is a payment made by the buyer to demonstrate his serious intent to purchase a property. However, there are a few unique characteristics that make this payment different from the due diligence fee.

One major difference is that the earnest money deposit is paid by the buyer but the money does not go directly to the seller. The money is held by the closing attorney or in an escrow account controlled by a neutral third-party until the deal closes or is cancelled. The earnest money deposit is not paid directly to the seller because the buyer is entitled to a full refund of the deposit if the deal is cancelled for any reason during the due diligence period. Once the due diligence period expires, the seller is entitled to receive the money – either as an amount applied to the final purchase price or as compensation for the deal being cancelled after the due diligence period. In this way, the Earnest Money Deposit can serve as a good-faith deposit made by the buyer and a form of protection for the seller if the buyer breaches the contract.

Buyers and sellers negotiate the amount of Earnest Money Deposit that is paid, just like they do with the due diligence fee. The amount paid for earnest money is often higher than the amount paid for the due diligence fees, but it does not have to be.

A quick summary of all the details discussed above are in the table below.

Due Diligence Fee	Earnest Money Deposit
- Non-refundable	​- Refundable if buyer backs out before end of due diligence period
- Paid directly from buyer to seller	​- Paid from buyer to closing attorney or to escrow account
- Amount negotiated between buyer and seller	​- Amount negotiated between buyer and seller

As mentioned before, a real estate agent can be helpful in sorting out these fees and deposit amounts. If you’re buying or selling a home without a realtor, to avoid the additional fees they charge, hopefully you’ll find this article helpful in navigating your deal with confidence.