The earnest money deposit (EMD) and due diligence fee (DDF) are two deposits made on behalf of the buyer that demonstrate the buyer’s willingness and commitment to fulfill the terms of the contract. The higher these two figures are, the greater the buyer’s commitment to the contract – more “skin in the game,” you could say. While the seller and seller’s agent will want to maximize the buyer’s commitment, it is our job to minimize our buyer’s liability. So, we will work with the buyer to determine the most agreeable amount of money that both limits their liability and relays confidence to the seller.
The earnest money deposit is made payable to an escrow agent, most commonly the buyer’s closing attorney. This money is held in escrow until closing, at which point it is credited back to the buyer on the closing disclosure.
The due diligence fee is made payable directly to the seller. The seller can spend this money as they please regardless of how the contract plays out. This fee is also credited back to the buyer at the time of closing.
The earnest money deposit is presented either with the offer or within 5 day of the effective date of the contract while the due diligence fee is due with the offer. However, both deposits are not made payable until the effective date of the contract. In other words, you do not have to pay these items unless your offer is accepted by the seller.
The key difference between the earnest money deposit and due diligence fee is that the EMD is potentially refundable, where the DDF is not.
In the event that the buyer were to decide to terminate the contract BEFORE the expiration of the due diligence date, the buyer will be given their earnest money deposit back; however, the seller gets to keep the due diligence fee. If the buyer were to terminate the contract AFTER the expiration of the due diligence date, the buyer would be in breech of contract and the seller keeps BOTH the earnest money and the due diligence fee.
Understanding the terms “earnest money deposit” and “due diligence fee” is crucial to the offer process and ensuing negotiations. These two items are presented in the Offer to Purchase and can be used as leverage points to make your offer more appealing to a seller. In some situations, earnest money and due diligence fee, when executed properly, can set your offer apart from others that may have been presented, giving you a competitive advantage in a multiple offer scenario.