Property investors looking to purchase commercial real estate in the more affordable of the Carolinas should have a good grasp on the uses of due diligence and earnest money in South Carolina, as well as how these tools can drive important property purchases to the finish line.
As the economy continues to fluctuate, the US’ $1.2 trillion real estate market—the largest in the world—is chugging along, fueled by the continuing need for industrial and retail spaces, which are overtaking office spaces as the must-needs of the CRE world.
With cities Raleigh and Charlotte, North Carolina recently named some of the best real estate markets in 2023, sister state South Carolina is quickly attracting a lot of attention from keen investors and buyers with its more affordable prices, lower crime rates, and more tolerable weather.
In addition, industrial development is strong in South Carolina. David Lockwood, Executive Vice President and COO of Colliers South Carolina notes that the state continues to see a “robust industrial market and a very active retail market.”
“Office leasing is strong with a definite flight to quality in the urban and suburban areas,” Lockwood says, though there is a weakening of large capital market investment sales of multi-family properties and office properties.”
According to the South Carolina Department of Commerce, industries such as manufacturing, trade, transportation and utilities, and health and education services, all saw net job increases in 2022.
South Carolina’s capital, Columbia, is steeped in robust industrial activity. A report from Colliers notes that the city needs “additional speculative development” to keep up with market demands.
Currently, construction is underway on 2 million square feet, scheduled for turnover this 2023. In Greenville, the manufacturing industry is driving industrial inventory even higher, with 20.9 million square feet of CRE properties under construction by the end of 2022.
Downtown Columbia, South Carolina
Investors and buyers looking to claim their piece of South Carolina need to understand the state’s unique practices when it comes to due diligence and earnest money processes.
In this detailed guide, we take you through the roles of due diligence and earnest money in South Carolina and iron out any confusing details, so that you can focus on your bottom line—securing the right CRE property for your business and investment needs.
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In residential and commercial real estate, a due diligence fee—also known as an option fee—allows the buyer to inspect different aspects of a property they are interested in before finalizing the sale.
This includes examining the property’s market and competitive position (market due diligence), analyzing income and expense statements and lease contracts (financial due diligence), conducting a title search and checking zoning regulations (legal due diligence), and inspecting the building’s structure—such as a termite check on an office or home inspection—and mechanical systems (physical due diligence).
During what is known as a due diligence period, the buyer has the chance to negotiate any potential issues with the seller—such as negotiating and agreeing on property repairs and repair procedure—before going through with the deal.
Jason R. Rittie, partner at Einhorn Barbarito Attorneys at Law, puts it succinctly—“By conducting proper and adequate due diligence, the purchaser can make themselves aware of all material facts and defects about the property to determine whether the purchase is a good acquisition at a fair price.”
Rittie notes that “unlike residential home purchases that have certain consumer protection laws applicable to them, the purchase of commercial real estate has few protections and leaves a purchaser to examine, judge, and decide for themselves whether a particular piece of property is suitable for their needs.”
It is important to note that while the practice in most US states is to pay the due diligence fee to the seller upfront at the time of the offer, South Carolina handles due diligence differently.
We will cover all that and more in the coming sections.
When managed properly, the due diligence process can build confidence between the buyer and the seller in the CRE property or home buying process and push a deal closer to completion.
It’s easy to get confused between due diligence and earnest money in South Carolina (and in other US states). Let’s clear that up.
Earnest money, also called a “good faith” deposit or a soft deposit, is money that buyers put down on a property prior to the closing date to demonstrate to sellers that they are serious about seeing the sale through. It shows their commitment to purchasing the property and gives the seller assurance, establishing trust between both parties.
The earnest money is held in an escrow account—a legal arrangement in which a third party (an escrow agent) temporarily holds property or money until particular conditions have been met—until the sale is completed, at which point it can either be applied to the buyer's closing costs or refunded if the buyer backs out of the transaction for reasons outlined in the purchase agreement.
In the event that the buyer fails to complete the purchase and the deal falls through, the seller can keep the earnest money as compensation for their time and effort, and in some cases—depending on contingencies agreed by both parties in the purchase contract—earnest money is refundable to the buyer.
The due diligence period can take place before or after signing the purchase and sale contract. However, if due diligence takes place prior to contract signing, a seller will normally require some form of confidentiality or early access agreement.
Normally, a due diligence period for a commercial property in South Carolina can last between 10 to 14 days (until 6:00PM on the last day). A due diligence period can be as short as one to three days and as long as 30 or even 60 days. Buyers and sellers can agree on longer or shorter periods of time, depending on both parties’ needs.
It is during this period that the buyer conducts their own due diligence on the property. If the buyer identifies items that need to be repaired or serviced, they must get the seller to sign off on repair requests during the due diligence period (the actual repairs can take place after).
It is also vital to note that the buyer must negotiate the right to terminate the contract at any time during the due diligence period, with written notice to the seller.
If the buyer discovers something they are not happy about and terminates the contract within the due diligence period, they are entitled to get their earnest money deposit back. If the buyer terminates the contract after the agreed upon due diligence period, the seller gets to keep the earnest money.
While not legally required, using due diligence and earnest money is a fairly standard practice in most real estate transactions across US states, though individual states may have practices that differ.
In examining due diligence and earnest money in South Carolina, you will find that the Palmetto state (as it is also known) has its own unique practices.
Let’s take a look at the similarities and differences in due diligence practices between South Carolina and its northern sister, North Carolina.
In both North and South Carolina, if the buyer decides not to go through with the contract, they must do so by the due diligence due date (the agreed-upon end of the due diligence period).
In North Carolina (and most other US states), the buyer pays the due diligence money to the seller at the time of the offer, but in South Carolina, the buyer only pays it if they want to terminate the contract, and they must issue the seller an accompanying written termination notice.
In South Carolina, the due diligence fee is also known as a termination fee or a “get-out” fee.
“In South Carolina, we do it a little bit differently. We don’t actually pay the [due diligence] fee,” says Jennifer Nicely, an instructor at Pinnacle Real Estate Academy, adding that the buyer doesn’t pay that fee until they want to terminate.
“It is a get-out fee, so they pay it when they get out. And in a perfect world, they’d want to pay it before this date [the due diligence date],” says Nicely.
Certified Real Estate Specialists Brandi Cook and Vikki Crossland of Meybohm Real Estate concur—“In South Carolina, the termination fee should not be prepaid or included in the offer. We understand other states do this, but in South Carolina, that is not how it’s done.”
“This termination fee is only due if the buyer decides to terminate the contract, and it must be paid directly to the seller along with the termination notice. It needs to be delivered within the due diligence period,” Cook and Crossland add.
As for earnest money in South Carolina, practices are similar to other states—If a sale does not go through for any reason, the earnest money may either be kept by the seller or refunded to the buyer, depending on the contract’s stipulations.
A good rule of thumb is that the buyer gets the earnest money back if the seller reneges on the real estate contract, and the seller keeps the earnest money if the buyer defaults.
Let’s break down due diligence and earnest money in South Carolina in a little more detail:
In terms of how to calculate due diligence and earnest money in South Carolina, Cook and Crossland also note that the percentage is not set in stone but rather strategic and based on negotiations and how badly the seller wants to sell and how much the buyer wants to buy.
As a general rule, earnest money in South Carolina is around 1% to 2% of the purchase price, considerably lower than other US states, where earnest money deposits can go as high as up to 10% of the property’s price tag.
Weighing in on how much earnest money in South Carolina should be, real estate agent Elizabeth Loadholt of AgentOwned Realty Co. shares good legal advice—while sellers feel that the larger the earnest money deposit, the more serious the buyer, it is not necessarily true, adding that her recommendation is for the earnest money to never exceed $7,500.
This is because $7,500 is the limit that a small claims court in South Carolina will handle. “If the sale falls through (does not close), and there is a dispute over who gets the earnest money, then it can be settled in small claims court (which normally can be handled within a few months) rather than the “big courts” (which can take years to resolve),” Loadholt says.
Meanwhile, due diligence in South Carolina is agreed upon between the seller and the buyer during negotiations and is non-refundable. While it can be any amount, $500 to $1,000 is standard.
When deciding how much to put toward a due diligence fee, buyers should know their comfort level and risk tolerance–how much they are willing to risk if the property is not right for them.
Belinda Frisch, a realtor at Bluefield Realty Group, reinforces that buyers need to be strategic when it comes to setting an amount for due diligence—“Like with earnest money, the termination fee and due diligence periods are terms of the buyer’s offer and the buyer’s choice. There is no standard termination fee or due diligence time frame. But these terms should be carefully considered based on market, demand, and other circumstances.”
Committing to a due diligence fee will also make a buyer’s offer stand out to the seller, signaling that they are a serious buyer showing commitment to the property.
Due diligence and earnest money in South Carolina are vital components in the commercial real estate purchasing process. The next question in buyers’ minds is a common one—how to come up with the funds for both.
With current difficult lending conditions in place, buyers are having to look elsewhere to get funding for their due diligence and earnest money costs. One solution is to use a Limited Liability Company (LLC) to make competitive CRE transactions—like purchasing an office property in a metro area—run much more smoothly.
LLC-based lending is a smart choice for many as it does not require credit checks or the need for collateral normally required by traditional lenders. As a matter of fact, it does not require any capital from the buyer, because the LLC will stand as the legal entity in the transaction on the buyer’s behalf, reducing the borrower's personal liability and doing away with liens documentation.
At Duckfund, our LLC-based lending service is all about ease and speed—funds for your due diligence and earnest money deposits will be made ready within only 48 hours after approval (and the call option agreement signing). We manage the escrow deposit and purchase agreement for you, freeing up your plate to deal with the more important decisions—whether or not the property is right for your needs and how quickly you want to secure it, especially in competitive markets.
Our easy application process only takes a few minutes to fill out, allowing you to obtain the funding you need for the property you want within 48 hours, without headaches and stress.
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