Earnest Money--Required or Suggested

I am fairly new to the world of commercial real estate. We are looking to close on a multi-family complex in a college town. We have been told that it is recommended that my partners and I offer $15k-$20k in earnest money for this deal. We have the financing, proof of funds, and management in place...we just can't spare that amount for earnest money.

Are there any creative strategies or ways that any savvy commercial investors have used out there to avoid putting down earnest money in commercial real estate transactions? Any suggestions would be welcomed.

Edited: 06/26/2010 at 07:29AM

Tim W.

Real Estate Investor · Indiana, Indiana

4333 posts
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Icon_minipost Mar 06 '09, 01:24 PM

Have the check for the earnest money be held by the buyer's agent or attorney.

Edited: 06/26/2010 at 07:30AM

Harrison Painter

· Indianapolis, Indiana

762 posts
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Icon_minipost Mar 06 '09, 02:08 PM

This will be another one of those state by state issues.

In the state of Indiana, earnest money must be held by the listing agent, as they are responsible. Out west, earnest money is usually held by the title company.

If there is no listing agent involved, then take Tim's advice and make sure it is with your agent, title company, or attorney closing escrow has it.

It is very difficult to get around earnest money, as it tells the Seller you are serious. The larger the earnest money, the more serious a Seller will look at your offer.

If you want the deal, and it makes sense, there is no real reason to skirt the earnest money. If you do not have enough cash to cover it, then you probably should not be buying it anyway.

So in my opinion, earnest money is required!

Edited: 06/26/2010 at 07:30AM

Tim W.

Real Estate Investor · Indiana, Indiana

4333 posts
23859 Influence
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Icon_minipost Mar 07 '09, 05:26 AM

Originally posted by Harrison Painter

In the state of Indiana, earnest money must be held by the listing agent, as they are responsible.....So in my opinion, earnest money is required!

Harrison is correct on the first part of this statement for Indiana (in Illinois for example, the buyer's agent/attorney can hold the earnest) but it bears noting that in Indiana and in many other states, earnest money need not always be "cash money". It can be a promissory note, post dated check or something else of value as determined by the contract. I did a perfectly legal transaction in Indiana where my "earnest" was a letter of intent. In fact, in a surprising number of states, earnest money is not required by law at all. If you sign the contract requiring earnest however, it is required by the contract.

As many contracts used by investors and banks are written by Realtor associations and Realtors know that people are much more likely to close a deal they've put earnest down on - the majority of people have assumed for years that earnest money is simply required by law simply because they have only seen or heard of contracts requiring it. When you're dealing with earnest money amounts on a large scale, it certainly pays to familiarize yourself with your options.

Tim

Edited: 06/26/2010 at 07:30AM by Tim W.

Julian Hart

Real Estate Investor · Memphis, Tennessee

5 posts
26 Influence

Icon_minipost Sep 06 '09, 03:30 PM

Ivan, Did you u close the deal?

Edited: 06/26/2010 at 09:38AM

Ivan Jenkins

Real Estate Investor · Clemson, South Carolina

16 posts
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Icon_minipost Sep 06 '09, 10:57 PM

Julian,
We did not close the deal unfortunately. The seller was not satisfied with the 1.5% earnest deposit we were willing to make despite our proof of funds and ability to close quickly.

This was my first commercial RE negotiation and I am thankful that we did not lose more money on the order of an appraisal and inspection for a property with such an "unmotivated" seller.

FYI: Property remains on the market

Edited: 06/26/2010 at 09:38AM