Chapter Two: Due Diligence Isn’t A Down Payment

Confession #2: Due Diligence Isn’t A Down Payment

I got fired by a client once, and it wasn’t because I didn’t show her enough houses. It wasn’t because I failed to negotiate. And it wasn’t because I missed an important deadline.

I got fired because I talked her out of buying the house she loved.

…At least, that’s how she saw it.

Let’s back up.

This particular client came to me as a referral from a past client. She was coming into town from out of state, so we packed as many showings as humanly possible into one day.

Single-family homes.
Townhomes.
The whole nine yards.

And did I mention this was 2022?

If you weren’t buying a house then, let me set the scene.

Mortgage interest rates hovered just over 3% at the start of the year, however, word on the street began buzzing pretty quickly that rates were going to start to hike upward as the Fed was attempting to combat inflation, so lots of buyers were on the move to attempt to get in while the cost of borrowing was still low. Needless to say, homes were flying off the market. Multiple offers were everywhere. Buyers were offering tens of thousands over asking price. Some were buying houses sight unseen. Appraisal discrepancies were becoming a very real problem.

Alright. Back to the story.

This buyer had about $20,000 in liquid cash available for her purchase, and we pretty quickly found a townhome she really loved.

It was listed for $385,000, but based on the comparable sales, I felt the market supported something closer to $365,000.

Her first instinct?

“Let’s offer $319,000.”

I thought we could work with that, but I wanted to contact the listing agent to get a better feel for what was happening behind the scenes. The house had only been on the market for two days.

There was already an offer in hand, another offer was on the way, and they set an offer deadline for the next day.

Translation:

This was probably not going to be the moment for a $319,000 offer to sneak in and steal the house.

I went back to my buyer and laid out the situation. We talked through different strategies and about what sellers actually care about. We talked about price, terms, and how to make an offer competitive. I told her that, given the circumstances, it would probably take a pretty aggressive offer to win this one.

And so she changed her strategy and decided she wanted to offer the full $385,000 asking price.

Okay…

Still her decision.

But then she told me what she wanted to put down as her due diligence fee:

$20,000.

All of it. Every dollar of her liquid cash.

Now this is where I hit the brakes - not because I didn’t want her to buy the house, but because I wanted to make sure she understood what she was actually risking:

If she put $20,000 into due diligence, that left her with nothing for a potential appraisal gap, nothing for closing costs, and nothing for the unexpected expenses that inevitably pop up during a home purchase.

And remember: the house was listed at $385,000, while the comparable sales were supporting something closer to $365,000.

If she offered $385,000 and the home appraised for $365,000, we could potentially have a $20,000 appraisal gap.

Where was that $20,000 supposed to come from?

She would have already given it to the seller.

And this is where I think a lot of buyers misunderstand due diligence.

Due diligence isn’t a down payment.

Yes, the due diligence fee can ultimately be credited toward the purchase price at closing if the transaction closes, but that doesn’t mean it’s money you can safely throw into the offer without considering what happens before closing.

In North Carolina, the due diligence fee is generally paid directly to the seller and is typically non-refundable if the buyer terminates during the due diligence period, subject to the terms of the contract.

Think of it more as a termination fee. Whatever you decide to pay here is what it will cost you to terminate the contract if need be. In order for a seller to take the home off the market for you, and hold it for you while you inspect and investigate, it’s going to cost you something. And it has an expiration date. It’s also non-refundable in the event you decide to terminate prior to this period expiring.

So if you’re working with $20,000 total and you put $20,000 into due diligence, you’ve effectively committed every dollar you have to one piece of the transaction.

And if something goes sideways?

The appraisal comes in short…
The home inspection fails…
You unexpectedly lose your job or have a change of heart…

You don’t have a secret second $20,000 waiting in the wings. And what you just paid to that seller now belongs to them. Non-refundable. Period.

That was my concern, and it wasn’t just mine.

Her lender was also encouraging her to consider homes at a lower price point because she didn’t have a lot of liquid cash available for the purchase. A lower price point would have given her more flexibility - more room for closing costs, more room for an appraisal discrepancy, and more room to structure a competitive offer without putting every dollar she had at risk.

Oh but this client…She didn’t particularly like that advice either.

In fact, she called me privately and told me she wasn’t going to use that lender because she felt insulted by his suggestion.

So there I was: now I had a buyer who was determined to stretch to the very top of her budget, a lender telling her she should consider a lower price point, and me telling her that putting her entire $20,000 into due diligence left her with essentially no financial cushion.

And here’s the part I want to make very clear:

I never told her not to buy the house.

I told her I was ready and willing to do whatever she felt comfortable doing.

My hesitation wasn’t about the house. It wasn’t about whether I thought she deserved the house. It wasn’t about whether I thought she could win.

It was about making sure she understood every financial consequence of the strategy she was choosing.

If she wanted to make that offer, I was ready to send it…But she needed to understand the risk first. (In fact, I did write it and send it to her for signatures, but she continued to have pause because even though I believe she was looking for someone to blame, she was thinking through what we had been talking about.)

She ultimately decided not to submit the offer, and just like the listing agent had communicated with the offer deadline, the house went under contract almost immediately.

She then asked me to schedule another showing for a different property. So I did, and I confirmed the appointment with her.

Everything was moving forward.

Then I woke up Saturday morning and checked my email to discover there was a message from her.

She felt that I had talked her out of buying the only house she truly loved.

She wanted to terminate our buyer agency agreement.

No phone call.
No text.
Just an email.

Which, incidentally, was particularly interesting because if I hadn’t happened to check my email that Saturday morning, I would have shown up to that scheduled appointment expecting her to be there.

She wouldn’t have been.

And that’s the thing about being a buyer’s agent:

Sometimes the advice you give isn’t the advice your client wants to hear.

But my job isn’t to tell someone what they want to hear just because I want to keep the transaction moving.

My job is to help them understand the risks and consequences of the decisions they’re making.

Could she have offered $385,000 with $20,000 in due diligence and won the house?

Absolutely.

Could the appraisal have come in at $385,000?

Sure.

Could everything have worked out perfectly?

Of course.

But “it could work out” isn’t the same thing as “this is a financially sound risk for you to take.”

And when you’re working with $20,000 in total liquid cash, those are two very different conversations.

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