Due Diligence Vs. Earnest Money: Understanding the Differences in Real Estate Transactions

due diligence vs earnest money

When it comes to real estate transactions, there are a lot of moving parts to keep track of.

Two concepts that are often confused are due diligence and earnest money. While both play important roles in the buying and selling process, they serve distinct purposes. Understanding the differences between these two concepts is crucial to ensure a smooth and successful transaction. We’ll explore due diligence vs. earnest money and why they matter in real estate.

If you need help navigating due diligence, earnest money payments, or any other area of the real estate transaction process, talk to an experienced Houston real estate attorney at The Titus Law Firm.

What Is Due Diligence?

In Texas real estate transactions, due diligence refers to the period in which the buyer is allowed to conduct investigations and inspections on the property to ensure that it meets their expectations and requirements.

This could include things like:

  • Property inspections
  • Property surveys
  • Title searches
  • Environmental assessments
  • Zoning reviews

During the due diligence period, the buyer can negotiate with the seller to address any issues that arise from their investigations, or they can choose to terminate the contract without penalty if they are not satisfied with the findings.

Ultimately, conducting due diligence helps buyers make informed decisions and minimizes the likelihood of unpleasant surprises down the road.

What Is a Due Diligence Fee?

In Texas, a due diligence fee is a non-refundable fee that is paid by a buyer to a seller as a deposit on a real estate transaction. The fee is meant to incentivize the seller to complete the due diligence process and provide evidence that the buyer is serious about buying the property. The fee is typically between 0.1% and 0.5% of the purchase price.

Due diligence fees are non-refundable but usually credited toward the purchase price at closing.

What Is Earnest Money?

The term “earnest money” refers to the deposit that a buyer puts down to show their commitment to purchasing a property. This deposit is not paid directly to the seller but is typically held in an escrow account and applied toward the purchase price at closing.

Earnest money serves as a form of assurance for sellers and tells them that the buyer is serious about the transaction. It also prevents the buyer from walking away from the deal without valid reasons.

The amount of earnest money required can vary depending on the purchase agreement terms and the property’s value. However, it’s typically between 1-3% of the purchase price.

In many cases, the earnest money is non-refundable, but it all depends on the contingencies put in place in the purchase agreement.

Which Happens First, Earnest Money or Due Diligence?

In Texas real estate transactions, earnest money is typically deposited before the due diligence fee. Once the buyer and seller agree on the terms of the purchase, the buyer will usually provide an earnest money deposit to demonstrate their commitment to the transaction.

After the earnest money is deposited, the seller typically takes the property off the market while the buyer conducts due diligence to ensure that the property meets their expectations. The due diligence fee, if applicable, is typically paid during the due diligence period and is separate from the earnest money deposit.

Why Are Due Diligence and Earnest Money So Important in Real Estate Transactions?

Both due diligence and earnest money are crucial to ensuring that a real estate transaction proceeds smoothly and that both parties are protected. By conducting due diligence and providing earnest money, the buyer can move forward with confidence. They’ll know they have thoroughly investigated the property and are committed to purchasing.

Meanwhile, the seller can have peace of mind knowing that the buyer is serious about the transaction and has the financial means to follow through.

Contact an Experienced Houston Real Estate Attorney

Due diligence and earnest money are vital components of a successful real estate transaction. However, working with a competent real estate attorney is essential to navigating these complex processes.

A skilled attorney can review contracts, assist in identifying issues during the due diligence process, and ensure that your earnest money is protected. By working with an experienced attorney, you can protect your investment and have peace of mind throughout the entire real estate transaction.

Contact The Titus Law Firm today for all of your real estate transaction needs.

Author Bio

Eddison S. Titus

Eddison S. Titus is the Founder of The Titus Law Firm, a Houston estate planning, business law, and real estate law firm he founded in 2016. He has successfully represented clients in a wide range of legal matters, including will and trust creation, probate, real estate transactions, business formation, business and contract disputes, and business succession planning.

Eddison received his Juris Doctor from the Charlotte School of Law and is a member of the State Bar of Texas.

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