In 2011, I started my real estate career in Macon, Georgia. It’s a small town an hour south of Atlanta along I-75. At that time, we were barely starting to rise from the 2009 real estate crisis. The complete opposite of a hot market. An over asking price of a home buying offer was unheard of. In fact, “low-ball” offers we normal. Also, due diligence and earnest money amounts were tiny. For instance, $500 on a $300,000 property, topping out at 1% of the offer price divided between due diligence and earnest money.
Fast forward to today, October 2021, and the landscape has significantly changed. We all know it’s a hot market, but it’s eye opening to understand how it has changed. Firstly, the terms of the offer to purchase contract have changed. Due diligence money is a negotiated, non-refundable financial consideration presented to the seller at time of offer. It allows the buyer to walk away from the deal for any or no reason. At closing, the buyer receives a credit for that amount that goes towards the payment of the house.
Offer to Purchase Contact Changes
In the latest offer to purchase contract, there is explicit language about a sellers right to collect the due diligence monies. This includes the collection of attorney’s fees. If the buyer fails to deliver the fee or back out of a signed contract prior to delivering the fee the seller can seek remedy. This isn’t such a big deal when it’s $500 or so, as spoke of above. It becomes a civil court matter. Most are unlikely to pursue for such a low amount. But in today’s market, it’s easy to have the due diligence amount be $20,000 or more.
Delay of Closing Grace Period Change
Additionally, the new offer to purchase changed the delay of closing grace period from fourteen days to seven days. If the buyers lender encounters issues or the appraisal results in the buyers having to bring more money to closing, it’s easy to go over the seven-day period. This may result in a contract breach if a new agreement isn’t reached. Many sellers will not renegotiate. They have the buyers due diligence money and back up offers. At worst the seller simply puts the home back on the market.
Hot Market: Larger Due Diligence Fees Change the Game
A substantial, non-refundable due diligence fee removes or severely limits a buyer’s negotiating power once in the due diligence period. If serious issues are found during inspection of the property, the seller isn’t inclined to address them. They’ll say ‘No,’ and keep the buyers fee.
Also, if the offer price is not supported by the lenders appraisal the tension is heightend. The buyer has to bring more money in order to close. If this isn’t possible they’ll have to renegotiate the loan or find a new loan product. Both of which will increase the loans cost. They can cancel the contract, but leave the due diligence fee. But with large sums of money, that action hard to swallow.
Change of Perspective Due To A Hot Market
There are other differences, but these are the most dramatic. When consulting with my buyers, I always set the foundation with information on the process and its inner workings. It actually helps shape the home search. Some buyers will say that they will look further out at new home construction seeing that as a more controllable and fair path, they may lower there target price to find properties that may get them close to what they want but let them conserve cash. With improvements they can make it a home they love. While others go to the sidelines to wait for a more buyer friendly climate.
If you’re looking to start your home buying journey, I’d love to help.
Please note: I am not an attorney, and this post should not be considered legal advice. Most of the legal text came from the Offer to Purchase Contract. Whenever I or a client have legal questions, I always recommend contacting a Real Estate Attorney.