Real Estate Wholesaling

An Investor Answers: As a Wholesaler, Should I Put an Earnest Money Deposit Down?

Expertise: Real Estate Wholesaling, Real Estate Marketing, Business Management, Personal Development, Flipping Houses
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I’m a wholesaler. Should I leave an earnest money deposit?

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I see a lot of wholesalers panic when asked to leave an earnest money deposit. I want you to always keep in mind that wholesaling is a business. And sometimes in business, you have to put up money to make money. Business is risky. And as a real estate investor, sometimes I have to buy myself into the deal. Still, I never try to spread myself too thin.

Recently, a good rental deal that came across my desk cost me $8k to get into. I had to put up $4,500 in non-refundable earnest money. I could have wholesaled it and made a quick $3-5k, but I wanted to keep it long term due to the cash flow and potential appreciation. Now, when you are wholesaling, you will typically deal with private owners or listed properties. When I say "listed properties," I'm referring to REOs, MLS properties or HUDs.

Related: 9 Reasons You Couldn’t Find A Buyer For Your Wholesale Deal

Private Sellers

As far as private sellers, I typically don’t leave any earnest money. The majority of the time, I put one dollar earnest money down. I will also say that I close about 95% of deals I get under contract. Every now and then, you will find a savvy seller who wants an earnest money deposit or seller’s attorney who wants you to put up earnest money.

That is fine; I have put up as much as a thousand dollars if I know it’s a good deal. The last time I put up earnest money, I wholesaled the house and made $17k, although I did have to split that with another wholesaler. We went into the deal knowing we had multiple options. Worst case scenario, we were willing to close on it with hard money and do the rehab.

With calculated risk comes big rewards. If you are new, I would recommend partnering with someone who is experienced to ensure your numbers are good. I am now working on a deal with a private seller that another wholesaler has brought me. I am putting up the earnest, which is $1k dollars. I also made calls to line up the hard money if in the worst case scenario we can’t sell in time. The potential profit on the wholesale is $17,500.

HUD and MLS Properties

HUD and MLS properties pretty much always require earnest money. When wholesaling off the MLS or HUD, be sure to have a very strong buyers list —  because they are not private sellers and in this strategy, it is very easy to lose earnest money deposits. I’ve had multiple newbies tell me they did not get out of contract in time and lost their $500 earnest money. I personally think you need to be experienced — meaning knowing your numbers are good — when dealing with listed properties. Once you have a contract signed, you should be picking up your phone, talking to buyers who can close fast. If you don’t have this kind of buyers, be cautious with this strategy.

Foreclosure Auctions

Another source that you can wholesale from (but I don't recommend it to new wholesalers, and I don't do it myself as of right now) is the foreclosure auction. The foreclosure auction in my state of North Carolina requires a 5% deposit of purchase and close within 30 days. I know a few guys who have used this source to wholesale, but they understand the whole process inside and out. Take my word for it: it's not as simple as it looks. These wholesalers, however, put up their own money and take the risk of finding a buyer. They are very successful at it because they know what they are doing.

Related: 10 Questions to Ask Investors Before Adding Them to Your Wholesale Buyers List

In conclusion, the wholesaling niche is a business and should be treated as such. Sometimes we have to write checks to get into deals. We are entrepreneurs a.k.a. risk takers. Also when I do leave an earnest money deposit, the check is written to an attorney. In the approximately 3-5 cases I wrote earnest money checks to sellers, I either knew them or recorded the contract against the property to ensure they would not sell to anyone else.

Put yourself in the seller’s shoes: If you were looking for a fast sell, do you want to talk to someone who will hold your property up for 30-45 days and disappear? OR do you want to deal with someone who is willing to put their money where their mouth is? I personally would go for the latter. If you treat people like you want to be treated, it will take you a long way in business… and life.

Wholesalers: What do you think? When do you put up earnest money for your deals?

Leave your comments below!

Nasar El-arabi has been involved in real estate for 12 years. During those 12 years, Nasar has wholesaled houses, rehabbed properties, built new properties, created a buy and hold portfolio, and fl...
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    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 5 years ago
    Thank you for writing this, Nasar. I enjoyed your podcast and love your ‘do’ attitude and website name. It is nice to see that some wholesalers back what they say by putting some cash down. The ones that don’t, then don’t complete the deal and leave the poor seller hanging wreck all of our reputations. On my latest wholesale deal (a 4-family with room to further develop) I got the non-refundable earnest money ($3k) from my buyer and split it with the seller. The seller and I both felt ok with that if he didn’t follow through in the 9 days given. I then got a back-up buyer just in case. The whole time, I would have been willing to put up the $3k and have skin in the game. Thanks again!
    Nasar Elarabi
    Replied over 5 years ago
    Thanks for reading Steve. And yes putting up money protects everyone..
    Merrick Loveland Flipper/Rehabber from Raleigh, North Carolina
    Replied over 5 years ago
    Good article Nasar. However, I would say the answer is always yes, no matter how you’re getting the deal. I know at least in NC the board of Realtors will call any contract without a deposit a ghost or illusionary contract, and if they see you assigning these deals they won’t hesitate to sue you to cease and desist. From my understanding must other state boards have similar policies.
    Nasar Elarabi
    Replied over 5 years ago
    @ Merrick you are correct about always leaving money. This article was written for people who panic when asked to leave 500 or more..
    Bill Neves Flipper/Rehabber from Vancouver, WA
    Replied over 5 years ago
    I’m not doing wholesale deals at the moment but when I did… When buying, I put $10-$100 for a deposit. Tied up 13 in one day for $10 each on one occasion. My title company called to see if I had gone crazy! When selling, $3-5k non refundable after inspection with no other escape clauses allowed. Your mileage may vary! Have fun!
    Nasar Elarabi
    Replied over 5 years ago
    thanks for reading & sharing
    William Escobar from Burbank, California
    Replied over 5 years ago
    Thanks for the post Nasar! As a newbie trying to do my first deal, I have a couple questions: 1. “Recently, a good rental deal that came across my desk cost me $8k to get into. I had to put up $4,500 in non-refundable earnest money.” What did the other $3,500 go towards? 2. “As far as private sellers, I typically don’t leave any earnest money. The majority of the time, I put one dollar earnest money down.” Who decides whether or not you leave an earnest money deposit, and who decides how much the earnest money deposit will be? What makes you leave a larger earnest money deposit for one deal and a smaller deposit for another? 3. “In the approximately 3-5 cases I wrote earnest money checks to sellers, I either knew them or recorded the contract against the property to ensure they would not sell to anyone else.” What does it mean to record the contract against the property? Any help is greatly appreciated!
    Brian Huber Investor Agent from Burke, Virginia
    Replied over 5 years ago
    @Nasar Elarabi, if you have financing and inspection contingency, and you pull out during the contingency period, can I get my EMD back? Thanks!
    Clifton Walker from montreal, quebec
    Replied over 5 years ago
    when wholesaling, is it always good practice to include a clause in your contract that the seller cannot sell the property to another buyer while they are dealing with you? What does it mean to record the contract against the property? also is it good practice to ask your buyer to make an earnest money deposit?
    Brandon Connell Investor from Galesburg, IL
    Replied over 4 years ago
    A lot of new wholesalers will be starting with piles of bills. To them, I often say that they have to find extremely motivated sellers that will take $1 or $10. If they are going to record it rather than using escrow, then the contract should be signed by both the seller and you at a notary. A recording can cost a fee as well, so there is more out of pocket. Someone with nothing can do something to get the little bit of money for such a deal. When they start with one like this, it also pushes them to make sure their numbers are right. The golden turkey sits at 70% ARV minus rehab costs and assignment fee. Naser, feel free to follow my link and join my cash buyer list in Charlotte.
    Tim Mendoza Investor from US & Calgary
    Replied 6 months ago
    Well, then, this seemingly invalidates the oft said/cited "No money down" aspect of real estate investing as a myth usually promoted for beginners wanting or needing to get started in this whole exercise when they have no funds. When you start out, you don't 'have a business' yet, you are trying to build one based on promotions of the guru's that you can in fact do so. ...scratching my head.....