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Corey Dutton
Pro Member
  • Lender
  • Salt Lake City, UT
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714
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How to Protect Your Earnest Money on Investment Property Purchases

Corey Dutton
Pro Member
  • Lender
  • Salt Lake City, UT
Posted Mar 7 2014, 16:51

Especially if you’re buying an investment property with a high ticket price, a buyer’s earnest money deposit, or EMD, can be quite a large sum. For example, on a $1 MM property purchase, a 1% deposit of earnest money would be a sum of $10,000. Some sellers ask for more than 1%. This could be a sum of money, for example, that is not worth risking should a real estate deal fall through. Below are a few helpful tips for how to protect your earnest money deposits on your property purchases:

1.Include a Contingency for Property Inspection: Even if you’re buying a property “as is,” your contract should include some kind of inspection period. This contingency is typically very broad and allows you to walk away with no questions asked if you discover some problems with the property.

2.Include a Contingency for Financing: If you aren’t paying cash for a property, you must have a contingency clause that allows you to have full written approval from the lender for your loan. Do not remove this contingency. If you do, you risk forfeiting your earnest money deposit. It is extremely hard to get financing these days on investment properties. Make sure you get lots of back up options for financing in place, before you get a property under contract. Bridge loans and hard money lenders are a good source of real estate loans for investment properties. This is an ESSENTIAL back up plan for financing on any deal.

3.Include a Contingency for Appraisal: If your lender requires an appraisal, the property needs to appraise greater than or equal to the purchase price. You should have the option to renegotiate the purchase price if the appraised value turns out to be less than the agreed upon purchase price.

Consult with an experienced and qualified real estate agent when dealing with such matters, and definitely don’t take my word for it. I’m not a licensed realtor. But should you enter into a contract on an investment property this year, heed the good advice of a licensed Realtor and protect your earnest money deposits at all costs. For alternatives and back up plans for financing, check out our bridge loan, frequently asked questions page. Don’t catch yourself in a bind where you lose your bank financing at the last minute with nowhere else to turn. This is not a fun place to be!

Would you add anything else to this discussion about protecting EMDs? Do you have an experience to share where you or someone you know lost an EMD?

Posted by Corey Curwick Dutton

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