In North Carolina, the Due Diligence Fee (DDF) and the Earnest Money Deposit (EMD) are two distinct, yet crucial, payments that serve different purposes in the NC Offer to Purchase and Contract (Form 2-T). A Provisional Broker (PB) must understand how to advise clients on the calculation of both amounts, as they are key negotiating tools. How do you calculate the DDF and EMD?
Both amounts are fully negotiable and not set by law. Their calculation is driven by local market conditions and the buyer’s motivation.
1. Calculating the Due Diligence Fee (DDF)
The DDF is paid directly to the seller and compensates them for taking the home off the market during the Due Diligence Period. This amount is immediately non-refundable if the buyer walks away for any reason.
- Calculation Method: DDF is calculated as a fixed dollar amount ($X), not a percentage.
- Typical Range: In balanced markets, the DDF often ranges from hundreds of dollars to a few thousand dollars (e.g., $500 to $3,000 for a median-priced home).
- Market Influence: In hot, competitive markets (like Raleigh or Charlotte), buyers often increase the DDF significantly (sometimes to 1% or more of the purchase price) to make their offer stand out, as it represents guaranteed cash for the seller.
- PB Advice: Advise the buyer to offer the lowest DDF for the longest DDP they think will win the contract, balancing risk (money lost) against time needed for inspections/appraisal.
2. Calculating the Earnest Money Deposit (EMD)
The EMD is a good-faith deposit that secures the contract. It is held in a trust/escrow account by the escrow agent (usually the Listing Firm’s trust account or the closing attorney’s trust account).
- Calculation Method: EMD is typically calculated as a percentage of the purchase price.
- Typical Range: The standard starting point for EMD is 1% to 3% of the offer price, though this varies by market.
- Refundability: The key difference is that the EMD is refundable if the buyer terminates the contract during the Due Diligence Period but is generally forfeited to the seller if the buyer breaches the contract after the DDP expires.
Final Disposition of Both Fees
If the transaction closes, both the DDF and the EMD are typically credited back to the buyer on the Closing Disclosure and applied toward the purchase price.
Key Takeaway
Both the Due Diligence Fee (DDF) and the Earnest Money Deposit (EMD) are negotiable; the DDF is a non-refundable fixed sum paid directly to the seller as compensation for the Due Diligence Period, while the EMD is a larger, typically 1% to 3% percentage held in escrow and usually refundable if the buyer terminates during the DDP.