Earnest money deposit on a new construction
Investor · New York, NY · Member since 2016 · 24 posts · 7 votes
Earnest money deposit on a new construction
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesQuote from @Alex Thomsen:
Quote from @Jason Wray:
Alex,
There is never a need to put that much money in earnest its usually because the seller or the builder is in a bind and need to quickly settle their debts or pay their vendors. You as the buyer also have rights under fair lending and you should never be forced to use a builders lender. 90% of the time lenders drop the ball and end up not being able to close on time or their overlays cost the buyer the deal and in some cases earnest money.
I would walk away from a deal that forces you to put $50K in earnest and use some generic lender who may not even be able to close the deal. Sounds like they have a back door deal where the lender or loan officer and builder or realtor all benefit from using each other (which is illegal).
Keep in mind its end of year pretty much every seller and builder is offering a 2% seller credit its the norm.
$50K in earnest is a lot and if the lender drops the ball are you positive they can get the credit denial out in time to refund the earnest? Charlotte is loaded with inventory are you sure this new build at Max cost is worth the headache versus a home selling for less that you can renovate yourself and increase the ARV?
Thanks Jason, this is really great input. I was also thinking something along those lines, but I am glad to know that you also think that $50k in earnest money deposit is excessive. I actually just sold an older property because there were too many repairs, so I was hoping to find something more hands off as I am an out of state investor.
As a new home builder myself in multiple markets.. Charleston SC and Portland OR. if its a presale we require 10 to 20k EM on 700 to 1 mil purchase none refundable and released once we go vertical. If the house is done NOPE just customary for our market which is 5 to 10k what we focus on is how much downpayment and lender they are using.. a good portion of our sales are all cash so that removes that uncertainty.. Unless you were getting a smokin deal like under 300k you might think to do that.. But one thing you can do so they dont high jack your EM remember both buyer and seller have to sign to release it if does not close.
Is see if you can put up NO EM but put 50k as downpaymnet for the property show it as part of the purchase price then you can demand it back on just your sig
13 Replies
- 1yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Alex,
There is never a need to put that much money in earnest its usually because the seller or the builder is in a bind and need to quickly settle their debts or pay their vendors. You as the buyer also have rights under fair lending and you should never be forced to use a builders lender. 90% of the time lenders drop the ball and end up not being able to close on time or their overlays cost the buyer the deal and in some cases earnest money.
I would walk away from a deal that forces you to put $50K in earnest and use some generic lender who may not even be able to close the deal. Sounds like they have a back door deal where the lender or loan officer and builder or realtor all benefit from using each other (which is illegal).
Keep in mind its end of year pretty much every seller and builder is offering a 2% seller credit its the norm.
$50K in earnest is a lot and if the lender drops the ball are you positive they can get the credit denial out in time to refund the earnest? Charlotte is loaded with inventory are you sure this new build at Max cost is worth the headache versus a home selling for less that you can renovate yourself and increase the ARV?
- Real Estate Agent · Albuquerque, NM · Member since 2015 · 542 posts · 193 votes1y
When you say that the seller is being pushy, does that mean you’re dealing directly with the builder’s sales representative? What’s your contract say about earnest money and why didn’t you consider your own representation by a Realtor?
The contract should have outlined the amount of earnest money you deliver.
- Investor · New York, NY · Member since 2016 · 24 posts · 7 votes1y
Quote from @Jason Wray:
Alex,
There is never a need to put that much money in earnest its usually because the seller or the builder is in a bind and need to quickly settle their debts or pay their vendors. You as the buyer also have rights under fair lending and you should never be forced to use a builders lender. 90% of the time lenders drop the ball and end up not being able to close on time or their overlays cost the buyer the deal and in some cases earnest money.
I would walk away from a deal that forces you to put $50K in earnest and use some generic lender who may not even be able to close the deal. Sounds like they have a back door deal where the lender or loan officer and builder or realtor all benefit from using each other (which is illegal).
Keep in mind its end of year pretty much every seller and builder is offering a 2% seller credit its the norm.
$50K in earnest is a lot and if the lender drops the ball are you positive they can get the credit denial out in time to refund the earnest? Charlotte is loaded with inventory are you sure this new build at Max cost is worth the headache versus a home selling for less that you can renovate yourself and increase the ARV?
Thanks Jason, this is really great input. I was also thinking something along those lines, but I am glad to know that you also think that $50k in earnest money deposit is excessive. I actually just sold an older property because there were too many repairs, so I was hoping to find something more hands off as I am an out of state investor.
- Investor · New York, NY · Member since 2016 · 24 posts · 7 votes1yI actually have a buyers agent representing me, but still everything needs to be done ASAP and the sales rep is trying to push him aside and communicate directly with me. I don't mind that so much and understand that she is just trying to sell the house. My issue is more with the amount of the earnest money deposit, which also is outlined in the contract. In the contract it states that the this deposit is nonrefundable, but I haven't signed anything yet. When I asked my agent about all this he just said that builders do things differently - however, there is still something that seems off to me. For example, if their lender drags things out and ends up offering mortgage conditions that are wildly different than what we have discussed then I would be forced to accept those conditions or lose $50k.
Quote from @Lydia S.:
When you say that the seller is being pushy, does that mean you’re dealing directly with the builder’s sales representative? What’s your contract say about earnest money and why didn’t you consider your own representation by a Realtor?
The contract should have outlined the amount of earnest money you deliver.
I have also asked if they could lower their earnest money deposit demand to something more reasonable, which they have refused. I just do not see any rational/benign reason for them charging so much in deposit up front considering that the house has not sold for 6+ months and I will be able to close relatively fast. - Real Estate Agent · Albuquerque, NM · Member since 2015 · 542 posts · 193 votes1y
I agree with Jason that it’s an excessive deposit and with his speculation as to why.
Does the sales rep know you’re an investor and not an owner occupant? Perhaps that’s another reason they want a large deposit.Maybe consider obtaining your own lender for financing. And your Realtor would know more about what’s typical with new construction in your State, but I feel they should be fighting for your interests, and be the one having the conversation with the sales rep about a reasonable amount for the earnest money deposit, on your behalf.
Glad you haven’t signed anything yet and hope you manage to come to terms that work for you.
Keep us posted!
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Alex Thomsen:
Quote from @Jason Wray:
Alex,
There is never a need to put that much money in earnest its usually because the seller or the builder is in a bind and need to quickly settle their debts or pay their vendors. You as the buyer also have rights under fair lending and you should never be forced to use a builders lender. 90% of the time lenders drop the ball and end up not being able to close on time or their overlays cost the buyer the deal and in some cases earnest money.
I would walk away from a deal that forces you to put $50K in earnest and use some generic lender who may not even be able to close the deal. Sounds like they have a back door deal where the lender or loan officer and builder or realtor all benefit from using each other (which is illegal).
Keep in mind its end of year pretty much every seller and builder is offering a 2% seller credit its the norm.
$50K in earnest is a lot and if the lender drops the ball are you positive they can get the credit denial out in time to refund the earnest? Charlotte is loaded with inventory are you sure this new build at Max cost is worth the headache versus a home selling for less that you can renovate yourself and increase the ARV?
Thanks Jason, this is really great input. I was also thinking something along those lines, but I am glad to know that you also think that $50k in earnest money deposit is excessive. I actually just sold an older property because there were too many repairs, so I was hoping to find something more hands off as I am an out of state investor.
As a new home builder myself in multiple markets.. Charleston SC and Portland OR. if its a presale we require 10 to 20k EM on 700 to 1 mil purchase none refundable and released once we go vertical. If the house is done NOPE just customary for our market which is 5 to 10k what we focus on is how much downpayment and lender they are using.. a good portion of our sales are all cash so that removes that uncertainty.. Unless you were getting a smokin deal like under 300k you might think to do that.. But one thing you can do so they dont high jack your EM remember both buyer and seller have to sign to release it if does not close.
Is see if you can put up NO EM but put 50k as downpaymnet for the property show it as part of the purchase price then you can demand it back on just your sig - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
@Alex Thomsen
That is Way too much and also in North Carolina there is some weird due diligence fee that is not refundable so be careful.
Definitely want an attorney on your side reviewing the purchase and sale agreement and just not rely on a buyers agent.
7e investments53 Reviews - 1yLaura ShinklePro MemberRealtor · Charlotte, NC · Member since 2017 · 357 posts · 292 votes
@Alex Thomsen I'm a Realtor in CLT and for that purchase price, that amount of EMD is excessive. I'm surprised that your agent is ok with it. Most builders in the area are 3-5% of the purchase price, so at a purchase price of $340,000 you'd be looking at a range of $10k-$18k-ish. Typically, this is also refundable should you not get qualified for a loan. (although I'm assuming you're preapproved and therefore that's not an issue).
My best advice would be to read through the contract carefully (builders usually have their own individual contract that's written for them and is leaning heavily in their favor). Make sure you understand what happens to your money and when. Maybe try to ask around about their reputation if they're not a large, national builder and then go with your gut. Make them an offer, let them know its your best one, and if they won't accept, then walk away. That's the beauty of investors, keep emotion out of it. There's always another house.
Hope this helps, and best of luck!
- Specialist · Little Rock, AR · Member since 2018 · 148 posts · 71 votes1y
@Alex Thomsen 50k in earnest money is excessive. The whole scenario seems odd. In my experience, I walk away from deals that don't seem right, because many times they aren't. For a seller to be that aggressive, ide let the seller find another buyer. The wonderful thing about Real estate is.... there will always be another deal that comes up if your looking.
- Investor · New York, NY · Member since 2016 · 24 posts · 7 votes1y
Thank you all for your weigh in on this deal. It is really wonderful to have such a great community to discuss these things with. I am going with my gut feeling on this one and walking away from the deal. The deal is just too odd and risky to pursue for me.
- Real Estate Agent · Austin, TX · Member since 2024 · 14 posts · 18 votes1y
1% Earnest money is the norm here in the Austin Texas metro. So if its 350k expect 3500$. If its a 6 mil land deal which is what I am working on currently, the expected em is 60k.
- Real Estate Broker · Charlotte, NC · Member since 2024 · 22 posts · 7 votes1y
Hey Alex!
Sorry to hear that this seller is giving you such a hard time. I do agree 50K EMD for a 340K home is way too high and raises some concern. If it's a contract the builder provided read over it to make sure that the EMD is refundable if you do consider moving forward with this deal. Honestly, it sounds fishy and not worth moving forward with.
- 1yAdam SchneiderPro MemberLender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
The standard NC contract (2-T) has two different deposit options. The Earnest Money Deposit (EMD) is refundable during the Due Diligence (inspection) period, and goes hard at the expiration of the DD period. That's held in escrow, usually by an attorney. The Due Diligence deposit is non-refundable and goes straight to the seller. You referenced Earnest Money and then referenced that it's non-refundable. So, I'm wondering if it's the 2-T that you are using or a different contract. Just a heads up for future reference. This deal that you mentioned sounds at first blush that it's dead in the water because of the large deposit.
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