Idiosyncrasies of different markets

15 Replies

Good morning! I am a new investor and after picking the Charlotte market and learning about the due diligence fee, I was wondering what other nuances there are for other markets that are specific to that market and not real estate in general? For example, the LLC transfer fee for Florida. Things to keep in mind when evaluating other markets to invest in. Thanks!

Originally posted by @Mitch Messer :

Hi @Susan Wang and welcome to BiggerPockets!

For those of us unfamiliar with the concept, can you please explain what a due diligence fee is?


Hi Mitch!

Sure thing, this concept was also new for me. It’s basically a fee that is negotiable that you place with your offer, instead of contingencies, and is non refundable if your offer is accepted. It allows you as a buyer to do an inspection, appraisal, etc. You can walk away from the deal before end of the due diligence period regardless of the reason, but you will lose the money.   If you go ahead with the offer, the fee is applied as credit towards purchase of the home.  In other markets you can lock up an offer and then during inspection you can walk away using a contingency without losing any money. A higher due diligence fee can make your offer more attractive, but obviously this is risky and also takes away some of your power during inspection for negotiation (the seller knows you have more to lose and may be less willing to negotiate).  

 

Originally posted by @Susan Wang :
Originally posted by @Mitch Messer:

Hi @Susan Wang and welcome to BiggerPockets!

For those of us unfamiliar with the concept, can you please explain what a due diligence fee is?


Hi Mitch!

Sure thing, this concept was also new for me. It’s basically a fee that is negotiable that you place with your offer, instead of contingencies, and is non refundable if your offer is accepted. It allows you as a buyer to do an inspection, appraisal, etc. You can walk away from the deal before end of the due diligence period regardless of the reason, but you will lose the money.   If you go ahead with the offer, the fee is applied as credit towards purchase of the home.  In other markets you can lock up an offer and then during inspection you can walk away using a contingency without losing any money. A higher due diligence fee can make your offer more attractive, but obviously this is risky and also takes away some of your power during inspection for negotiation (the seller knows you have more to lose and may be less willing to negotiate).  

 

Wow. Got it, thanks!

I think the due diligence fee falls squarely in the category of "stuff buyers do in a HOT market when they desperately want a deal and simply don't know any better!"

There's absolutely no way I would pay a significant fee that was not contingent on performance of my due diligence.

What would stop an unscrupulous seller with a property having a known major defect from dangling that stinker out in the market, attracting some unsuspecting and hapless would-be buyer, and then collecting easy, non-refundable money from them?

Originally posted by @Mitch Messer :
Originally posted by @Susan Wang:
Originally posted by @Mitch Messer:

Hi @Susan Wang and welcome to BiggerPockets!

For those of us unfamiliar with the concept, can you please explain what a due diligence fee is?


Hi Mitch!

Sure thing, this concept was also new for me. It’s basically a fee that is negotiable that you place with your offer, instead of contingencies, and is non refundable if your offer is accepted. It allows you as a buyer to do an inspection, appraisal, etc. You can walk away from the deal before end of the due diligence period regardless of the reason, but you will lose the money.   If you go ahead with the offer, the fee is applied as credit towards purchase of the home.  In other markets you can lock up an offer and then during inspection you can walk away using a contingency without losing any money. A higher due diligence fee can make your offer more attractive, but obviously this is risky and also takes away some of your power during inspection for negotiation (the seller knows you have more to lose and may be less willing to negotiate).  

 

Wow. Got it, thanks!

I think the due diligence fee falls squarely in the category of "stuff buyers do in a HOT market when they desperately want a deal and simply don't know any better!"

There's absolutely no way I would pay a significant fee that was not contingent on performance of my due diligence.

What would stop an unscrupulous seller with a property having a known major defect from dangling that stinker out in the market, attracting some unsuspecting and hapless would-be buyer, and then collecting easy, non-refundable money from them?

Exactly! I think in a less hot market, if you are able to keep the DD fee pretty low, I guess it could be nice to be able to walk away for any reason, and technically the seller has to reveal any issues found during previous inspections for future buyers. It’s definitely something to be aware of, and I would only feel comfortable putting a DD fee if I was pretty sure there would be no issues with the property (aka my agent has walked the property before or has other knowledge about the property). Luckily my agent is super on top of it and has a lot of information so that I still feel like I can make an informed decision about whether a property is worth making an offer on or not. I would love to know if there are things like this to know about other markets too. For example, just learned how high property taxes are for out of state investors to South Carolina (extra 6% in addition to what residents pay). 

 

@Susan Wang What other RE markets are you considering? I'm currently active in Georgia, Texas, Nevada, and a few others. If you'd like to compare notes, my contact info is in my BP profile. (I don't DM on this platform.)

Sure sounds like earnest money or hand money in PA to me. The last earnest money amount I paid was $5000.

Typically local professional buyers with significant construction backgrounds who have a high degree of construction knowledge make high earnest-money offers in order to beat out offers from long-distance or timid residential buyers.

I wouldn't trust any agent to know that toilets flush clockwise in the northern hemisphere and counter-clockwise in the southern hemisphere. I would never put in an offer that included earnest money if it wasn't me walking the property, and only on a limited subset of properties that I knew well. This would change if I also included an inspection contingency for an inspection to be conducted by a professional housing inspector whose work I was highly familiar with.

So do you have a housing inspector you can rely on?

It confuses me that you do not think that this due diligence fee might be a peccadillo of your market and not exist in some form everywhere, although it shouldn't by this point. Every market has provisions for buyers not to waste their time with sellers who refuses to follow through on property sales, who balk and walk at the first sign that the property isn't in a virginal state of untouched purity. Real estate is REAL. It involves REAL land, and REAL structures erected on the land that are subject to the laws of nature. It's not all numbers and metrics and personalities. A tree whose roots are growing into a sewer line does not give a damn about the participants of the sale's sunny, can-do personalities, current mortgage rates, or how sweet 100 Baby's Breath Lane's cash-on-cash return looks on paper.

@Jim K. There is a due diligence fee in addition to an earnest money fee in North Carolina, and both of them can be used to sweeten up an offer.  Due diligence fee is nonrefundable and this is prior to any inspection being done, so being knowledgeable about construction can only help so much without actually walking a property, hence why I brought it up.  Is that what you meant?  I didn't realize that most places had two fees, I was under the impression that they had earnest money only.  

Originally posted by @Susan Wang :

@Jim K. There is a due diligence fee in addition to an earnest money fee in North Carolina, and both of them can be used to sweeten up an offer.  Due diligence fee is nonrefundable and this is prior to any inspection being done, so being knowledgeable about construction can only help so much without actually walking a property, hence why I brought it up.  Is that what you meant?  I didn't realize that most places had two fees, I was under the impression that they had earnest money only.  

("Ah, I see, he said, wiping the egg from his face.")

I'm sorry, Susan. I climbed up on my favorite hobby horse and started preaching. All I can see that would make the due diligence extra fee make sense would be a desire to curtail long-distance investment by ensuring that more people who have construction knowledge are actually walking the properties AND making the decision to buy. And even that's a very poor kind of sense. 

@Jim K. Thank you for explaining!  I agree that the intention behind it is to weed out buyers that are not serious, and yes it does make long-distance investing more difficult, although nothing is impossible.  Just takes a better team in place to be able to mitigate the risk.  Thanks for your feedback! 

Yes...in Texas we have option fee, which basically sounds like the same thing.  No set fee...for years is was about $100 for 10 days....walk away and seller keeps it....move forward and it goes towards your purchase price.....Gradually it has gone up and the # of days has gone down....from 10 it went to 7 days...last 3 years or so I have seen go to 5 and often 3 days...and not uncommon now to have NO due diligence period.  You wan the house, you bought it...no backing out....so NO days, no Money offered.   If there is 3 days...then we'll see anywhere from $250-$1500 option money now.   Get those inspections done quickly...and you're probably only backing out if it is something catastrophic....like a roof that the seller has no interest replacing....or extensive mold or extensive termite damage...or something like that.   People want to write winning offers.

@Susan Wang

Hi Susan,

I'm going to echo what you and others have said about the importance of having a solid team in place for acquiring properties. While there are property disclosures, sellers are not always forthcoming. In some cases, they just aren't aware of certain issues. In other cases, they deliberately hide issues, especially if FSBO, to push the sell through.

Recently, a client of my mine was considering purchasing another investment property. The property in question was inherited and had substantial termite damage. The sellers disclosed that there WAS a termite issue and that it had been treated. In actuality, the problem was covered up to the point were a structural engineer is required.

This probably could've slipped through the cracks if the buyer is long-distance but all of the fees mentioned work in the favor of sellers in the current market. Would-be buyers are willing to waive contingencies and pay any associated fees to submit more attractive offers.

It really all boils down to your investment strategy and how you analyze deals. If the numbers fit within your strategy, the fees are only nominal.

@Leonard Brown Thanks for the tips! Yes for sure, a boots on the ground team is definitely key to make long-distance investing work.  It is a seller's market which makes things difficult but numbers are numbers and they have to work.  I heard of some people putting in a $20k DD fee for a $500k property, to make their offers that much more attractive.  That's terrifying!  I need to mitigate risk so putting a huge amount of non-refundable money on the table definitely makes me wary, unless I am pretty confident of what I am walking into.  


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