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My son made an offer on his first home today in a Raleigh suburb. The home is $200,000. The due diligence he offered was $1,000 with a $4,000 escrow. The seller countered with $4,000 due diligence and no escrow. Because the market is so hot, he was allowed 30 minutes to examine the home before the next potential buyers were ready to look.
There is no way I can see taking a chance on $4,000 due diligence without knowing whether there are serious mechanical problems with the house. (For the record, due diligence in a seller's market should not be allowed. If it is, it should be limited to one house payment.) It turns out that the sellers have two mortgages. They just closed on their newer house, so they're strapped for cash.
As a buyer, a seller strapped for cash is a potential red flag. If they don't have any money, have they kept up with the maintenance on the property they're selling? Did they move because there are serious but undisclosed problems with the current house? (The new house they bought was only $275,000.) Inquiring minds want to know.
What I'm trying to understand is what protection my son would have against losing a $4000 due diligence fee.
There isn’t any. Due diligence gives your son the opportunity to walk away from the house for any reason during the agreed upon time period. It also is insurance to the seller. While the home is in due diligence, the house is basically off the market and other potential buyers can’t look at the house. If your sons walked away, the fee is goes to the seller as compensation for the 3 weeks or so the house was off the market. When we sold our house 2 years ago (market was hot but not as hot as it is now), we required a $3000 due diligence fee. Our house closed on time and the fee was subtracted from what they owed us.
You can either pay it or you can lose the house - that’s up to you to decide. I think you’re looking way too far into the sellers financial situation. They just want to make sure they have s serious buyer in a hot market, cause they can.
That being said, AFAIK 200k is cheap for any house in Wake County, so do your due diligence.
The fee is compensation for nothing at all. Nothing. It has become only a "Because we can" fee. I call it "Buying a Contract." Currently, it is "Buying a Contract at Blind Auction." Yes, the original intent on purpose and amount has been wildly perverted.
I have had buyers offer $10,000 unsuccessfully and $15,000 and higher successfully. But, obviously, at a different price range than your son.
The most obvious initial protection is a qualified buyers agent who works hard to find deal breakers prior to writing an offer.
He cannot afford a miss. It is a poor agent who will help him toss away $4000 without busting butt to find deal breakers.
Showed a $190,000 house Saturday. It was 50 years old and a flip about 5 years ago. Very cute inside, and very well kept. Nice. Tempting.
Went to look in the crawlspace. It was locked. Called the listing agent and asked if we could possibly get access.
We moved on to another house while waiting for a call back. Agent called. Seller knew nothing about a crawlspace or it being locked. But it was now unlocked.
In other words, we were the 5th or 6th showing and no one had even tried to open the crawlspace.
We went back and I took a look under.
It is a home inspectors qualifying exam. Too many issues to mention. No indication that anyone had even entered in years.
Insulation hanging down or laying in the dirt. Lots of PEX waterlines, but just sloppy, unsupported.
Partly new drains, but an old drum trap and galvanized drain piping coming from the shower. Shortcut by the flipper, because there is new PVC drain and P-Trap 4 feet away. The cast iron drain line was seeping at a hub about 6' from where it exited to the curb.
A bit damp. It was drilled for termite treatment and a prior listing had mentioned powder post beetles.
Pier and curtain wall foundation, which in itself is not an issue. But, then we noticed a crack stair-stepping and running all the way to a front window in the brick veneer front.
Case closed for these 1st timers.
I didn't even get to the likely aluminum branch circuit wiring or any other electrical considerations.
We were 5th or 6th, and the agent claimed multiple offers yesterday afternoon and closed off showings.
When people pay DD Fee and an inspector to open the crawl space there will be financial and emotional shock and horror.
"I am not a home inspector" might be the most common buyers agent dodge to avoid getting dirty and to develop skills. I am not a home inspector either. But, I am well enough paid to take an extra 5 or 10 minutes to protect my clients and their money, and at least help them make an informed decision.
If you think DD Fee is out of whack for buying a contract, take the next logical step, and think of the duress on buyers to close on a deal where they fear they cannot afford repairs and the sellers know they have DD Fee leverage on them and will do no repairs.
A bad buyers agent will leverage that duress on their client, knowing they are in a corner and may as well close.
Yeah, bitter times for most buyers in the Triangle real estate market.
Half an hour is typical now. MLS Rules have made it the default. Listing agents can extend that to an hour. But, they want to get as many people through as fast as possible. I tried to show one a week ago that only allowed 15 minute appointments, on a 3300SF house.
Last edited by MikeJaquish; 02-08-2021 at 05:53 AM..
The fee is compensation for nothing at all. Nothing. It has become only a "Because we can" fee. I call it "Buying a Contract." Currently, it is "Buying a Contract at Blind Auction." Yes, the original intent on purpose and amount has been wildly perverted.
I have had buyers offer $10,000 unsuccessfully and $15,000 and higher successfully.
The most obvious initial protection is a qualified buyers agent who works hard to find deal breakers prior to writing an offer.
He cannot afford a miss. It is a poor agent who will help him toss away $4000 without busting butt to find deal breakers.
Showed a $190,000 house Saturday. It was 50 years old and a flip about 5 years ago. Very cute inside, and very well kept. Nice. Tempting.
Went to look in the crawlspace. It was locked. Called the listing agent and asked if we could possibly get access.
We moved on to another house while waiting for a call back. Agent called. Seller knew nothing about a crawlspace or it being locked. But it was now unlocked.
In other words, we were the 5th or 6th showing and no one had even tried to open the crawlspace.
We went back and I took a look under.
It is a home inspectors qualifying exam. Too many issues to mention. No indication that anyone had even entered in years.
Insulation hanging down or laying in the dirt. Lots of PEX waterlines, but just sloppy, unsupported.
Partly new drains, but an old drum trap and galvanized drain piping doming from the shower. Shortcut by the flipper, because there is new PVC drain and P-Trap 4 feet away. The cast iron drain line was seeping at a hub about 6' from where it exited to the curb.
A bit damp. It was drilled for termite treatment and a prior listing had mentioned powder post beetles.
Pier and curtain wall foundation, which in itself is not an issue. But, then we noticed a crack stair-stepping and running all the way to a front window in the brick veneer front.
Case closed for these 1st timers.
I didn't even get to the likely aluminum branch circuit wiring or any other electrical considerations.
We were 5th or 6th, and the agent claimed multiple offers yesterday afternoon and closed off showings.
When people pay DD Fee and an inspector to open the crawl space there will be financial and emotional shock and horror.
"I am not a home inspector" might be the most common buyers agent dodge to avoid getting dirty and to develop skills. I am not a home inspector either. But, I am well enough paid to take an extra 5 or 10 minutes to protect my clients and their money, and at least help them make an informed decision.
If you think DD Fee is out of whack for buying a contract, take the next logical step, and think of the duress on buyers to close on a deal where they fear they cannot afford repairs and the sellers know they have DD Fee leverage on them and will do no repairs.
A bad buyers agent will leverage that duress on their client, knowing they are in a corner and may as well close.
Yeah, bitter times for most buyers in the Triangle real estate market.
Half an hour is typical now. MLS Rules have made it the default. Listing agents can extend that to an hour. But, they want to get as many people through as fast as possible. I tried to show one a week ago that only allowed 15 minute appointments, on a 3300SF house.
If it sells at or near list price, yes, it was. If it sits around or sells at $170,000, no.
I bet it goes for over list price.
It will be a good rental house for an investor. It will fly off the market. Myself, I would likely pay list price, but I could afford to address crawlspace concerns out of pocket. Most primary home buyers in that price range cannot.
So it was not priced attractively for my buyers at that point. They are not unlike the OP's son. They need to get it right the first time.
I think the problems would arise with a buyer going in and expecting a turn key property at that price point. Then when the inspection comes around and it needs 10k of work, they ant afford it and there goes the due diligence. So yes in this case a good agent would probably be invaluable to set realistic expectations.
As an outsider it seems obvious to me that any house in Wake at that price point is going to have some issues whether it’s with the physical structure itself, or the location.
I think the problems would arise with a buyer going in and expecting a turn key property at that price point. Then when the inspection comes around and it needs 10k of work, they ant afford it and there goes the due diligence. So yes in this case a good agent would probably be invaluable to set realistic expectations.
As an outsider it seems obvious to me that any house in Wake at that price point is going to have some issues whether it’s with the physical structure itself, or the location.
That is a bit over-simplified. I have buyers who will buy stuff that never would have sold in 2010, but getting outbid in the feeding frenzy.
And, I have met plenty of buyers agents who try to keep positive, but lapse into the thousand yard stare because they are spinning their wheels so hard.
You can hear flat resignation in their voices when their client doesn't get the house. Again... In 2010, it would be, "Seriously?!" Not today.
Buyers are making very solid offers and their agents are just getting a bulk email back that "the seller had so many offers and thanks for your interest."
My son made an offer on his first home today in a Raleigh suburb. The home is $200,000. The due diligence he offered was $1,000 with a $4,000 escrow. The seller countered with $4,000 due diligence and no escrow. Because the market is so hot, he was allowed 30 minutes to examine the home before the next potential buyers were ready to look.
There is no way I can see taking a chance on $4,000 due diligence without knowing whether there are serious mechanical problems with the house. (For the record, due diligence in a seller's market should not be allowed. If it is, it should be limited to one house payment.) It turns out that the sellers have two mortgages. They just closed on their newer house, so they're strapped for cash.
As a buyer, a seller strapped for cash is a potential red flag. If they don't have any money, have they kept up with the maintenance on the property they're selling? Did they move because there are serious but undisclosed problems with the current house? (The new house they bought was only $275,000.) Inquiring minds want to know.
What I'm trying to understand is what protection my son would have against losing a $4000 due diligence fee.
This is...unfortunately...the reality of the real estate market in the Triangle (and really, most of the US) right now. DD is a fairly-unique-to-NC part of the contract that adds an extra layer of risk and stress to buyers here and it has been bastardized as a leveraging tool for sellers and a "look at me pick me" for buyers.
I am currently in the market to buy myself and trying to stay under $300k. A few weeks ago there was a house in west Cary (Park Village) that was listed for $270k that "on paper" is exactly what I was looking for (and hundreds of other buyers as well) but knew it would be incredibly competitive. They held an open house (bad form in a pandemic) which happened to be at the same time I had already scheduled my appointment. There were no less than 20 groups of people at that house in the 15 minutes I was there with my father (a local builder) and sister. It was in the prestigious 27519 zipcode, had an attached garage, fenced in yard, new floors and looked very "pretty"......the listing agent was being bombarded with sweet-talking buyers and buyers agents....dad and I were looking in the crawlspace to see extensive wood-rot in the joists; a legitimate "wave" in the exterior wall where studs were clearly not been aligned property in construction and the masonite siding and facia boards basically all needed to be replaced.
I knew that to be a seriously considered offer for that house....a five-figure Due Diligence and $25k+ over list price offer would be required. Hard passed. I hope that it was an investor who offered cash and has the means to make the necessary repairs for the house who ended up getting it....but I fear a giddy first-time buyer thinking they were getting a steal for the area and plan to clear out their savings for the DD/Downpayment is the one who got emotional and bid high to get it. Their agent saying "this is a diamond in a rough and you won't find anything like this in this area" was technically correct..... but it is worth considering WHY that is the case and what taking on such a "unicorn" house entails....
That being said; on the flipside to this story...there was a house in Trailwood Hills in SW Raleigh that had similar "specs" to the one in West Cary that had gone on the market right after xmas that I toured, "inspected" and loved because it was clear it has been well maintained and fit the market for the area...but had been significantly under-priced by the seller/listing agent. Went high on DD and high on offer price feeling confident it was the right house for me but went just a little tiny bit less than my gut was telling me it could sell for because I thought "hey it's still way above list price"....didn't get the house and it just closed last week for a mere $1500 more than my offer had been with a similar loan type.
As an agent I am looking outside the area where I generally do most of my business as I don't want to be competing against my own clients as I've already had 3 sets of clients interested in the same property in the last week.....twice. There are 30-40 qualified and seriously interested buyers for every SFH that goes on the market in most of the Triangle. Of those; expect almost half of them to actually make an offer and of those; the majority will be significantly over list-price with five-figure DD amounts.
TL;DR..... check on major systems/structural elements when touring a house.... make sure your agent knows what to look for. If it looks sound.... go in strong (high DD included).... if it looks questionable; probably worth holding off.
Last edited by TarHeelNick; 02-08-2021 at 08:02 AM..
This is...unfortunately...the reality of the real estate market in the Triangle (and really, most of the US) right now. DD is a fairly-unique-to-NC part of the contract that adds an extra layer of risk and stress to buyers here and it has been bastardized as a leveraging tool for sellers and a "look at me pick me" for buyers.
I am currently in the market to buy myself and trying to stay under $300k. A few weeks ago there was a house in west Cary (Park Village) that was listed for $270k that "on paper" is exactly what I was looking for (and hundreds of other buyers as well) but knew it would be incredibly competitive. They held an open house (bad form in a pandemic) which happened to be at the same time I had already scheduled my appointment. There were no less than 20 groups of people at that house in the 15 minutes I was there with my father (a local builder) and sister. It was in the prestigious 27519 zipcode, had an attached garage, fenced in yard, new floors and looked very "pretty"......the listing agent was being bombarded with sweet-talking buyers and buyers agents....dad and I were looking in the crawlspace to see extensive wood-rot in the joists; a legitimate "wave" in the exterior wall where studs were clearly not been aligned property in construction and the masonite siding and facia boards basically all needed to be replaced.
I knew that to be a seriously considered offer for that house....a five-figure Due Diligence and $25k+ over list price offer would be required. Hard passed. I hope that it was an investor who offered cash and has the means to make the necessary repairs for the house who ended up getting it....but I fear a giddy first-time buyer thinking they were getting a steal for the area and plan to clear out their savings for the DD/Downpayment is the one who got emotional and bid high to get it. Their agent saying "this is a diamond in a rough and you won't find anything like this in this area" was technically correct..... but it is worth considering WHY that is the case and what taking on such a "unicorn" house entails....
That being said; on the flipside to this story...there was a house in Trailwood Hills in SW Raleigh that had similar "specs" to the one in West Cary that had gone on the market right after xmas that I toured, "inspected" and loved because it was clear it has been well maintained and fit the market for the area...but had been significantly under-priced by the seller/listing agent....went high on DD and high on offer price feeling confident it was the right house for me but went just a little tiny bit less than my gut was telling me it could sell for because I thought "hey it's still way above list price"....didn't get the house and it just closed last week for a mere $1500 more than my offer had been with a similar loan type.
TL;DR..... check on major systems/structural elements when touring a house.... make sure your agent knows what to look for. If it looks sound.... go in strong.... if it looks questionable; probably worth holding off.
And it wasn't even the Blessed and Ordained Holy Trinity of School Hysteria, was it?
Not DDES, DDMS, GHHS, but Salem ES, right?
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