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