Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes
I have a seller with several turn key rentals he's getting rid of. I am in the process of putting 3 under contract and he is asking for 10% earnest money on each. I'm still fairly new to wholesaling but isn't that a bit much? What is the typical percentage of sale price used to determine earnest money?
Once upon a time 10% was standard here ... but with the "forever ascending" real estate prices most Canadian markets have witnessed over the past two decades, deposits as a percentage of price tag have dropped dramatically.
I disagree with @Arlan Potter, 10% is not way too much. If we are selling a well maintained, up-to-date, performing property and are looking for a cash buyer, we may ask for a 10% deposit - depending on the final price tag. Part of the reason is to weed-out the wholesalers posing as buyers and the tyre kickers who aren't ready to play.
When the shoe is on the other foot, we have offered earnest money as high as 25% to convey we are serious and ready to go. We once made a 100% deposit on an REO we were after. We have never offered less than 5%.
That is a considerable amount, but it may be worth putting down if the deal is right. If it makes you uncomfortable, consider a longer DDP and set the conditions of the deal so that you are protected in case the deal falls through or you come across an issue that causes the numbers not to work in your favor...that's what I would do anyway.
I have a seller with several turn key rentals he's getting rid of. I am in the process of putting 3 under contract and he is asking for 10% earnest money on each. I'm still fairly new to wholesaling but isn't that a bit much? What is the typical percentage of sale price used to determine earnest money?
Ashley
Ashley, what part of town are these turnkeys in? I buy in Dekalb/Fulton and I'm interested in buying a package!
way too much. does he even own the properties? Clear title? Do you know this person?
how about this scam. advertise a group of rentals for sale. find a unsuspecting wholesaler and offer them a steal. Get a large escrow and vamoose.
Probably not, but legitimate deals do not need a high escrow. I bought a 32 unit deal with zero money escrow. I met with the owner, we verbally made a deal, created a simple contract, my bank went to work to fund the purchase.
Once upon a time 10% was standard here ... but with the "forever ascending" real estate prices most Canadian markets have witnessed over the past two decades, deposits as a percentage of price tag have dropped dramatically.
I disagree with @Arlan Potter, 10% is not way too much. If we are selling a well maintained, up-to-date, performing property and are looking for a cash buyer, we may ask for a 10% deposit - depending on the final price tag. Part of the reason is to weed-out the wholesalers posing as buyers and the tyre kickers who aren't ready to play.
When the shoe is on the other foot, we have offered earnest money as high as 25% to convey we are serious and ready to go. We once made a 100% deposit on an REO we were after. We have never offered less than 5%.
If I was giving away equity so that I could cash out, I would have no problem asking for 10% earnest money deposited in an escrow account. Another question is what is the actual number? Asking for $5,000 is different from $50,000. I am sure there are a ton of wholesalers promising the moon in Atlanta, I know there are a ton here in Tampa.
thank you all for the useful information! He is looking to just quickly get rid for quick cash. So I guess I understand both sides. Will take all advice into consideration! Much appreciated.
If you are presenting yourself as a cash buyer than 10% is normal for an earnest money deposit. Shows the seller you are serious and not just kicking tires.
In general it seems high, but it seems like a reasonable level if the seller is expecting a cash buyer. It especially seems reasonable if the seller is offering a discounted price in exchange for a cash transaction.
@Ashley LeBoeuf what ever you put down make sure it goes to THE ESCROW COMPANY and not to the seller. EMD is not their dinner money, it is to be held by the escrow company. If the seller wants the money, run NOT walk away!
EM is not necessary at all. A signed offer constitutes a binding agreement. A promise to pay $$ is viewed by the law as transfer of $$...at least that's what banks have told me when I offered EM and was turned down :) They wanted an enforceable contract, and EM has nothing to do with that.
Earnest money was pretty much invented by realtors, and the public was made to believe that it is a legal thing. The realtors need that money in escrow to cover their behinds, since they insert themselves into the middle.
Now - that doesn't mean you don't pay earnest money. You pay what you determine is fair to tie up the property. I usually pay as little as I can, but specify that it's non-refundable. However, if you put big $$ into EM, you cannot do that.
So - if you are serious, offer him closing in 10 days with $1,000 EM for his trouble, and make it non-refundable
How is the rest of the contract structured? Do you have financing contingencies? Does your state have an option period? What other contingencies do you have?
Earnest money means very little if you have a financing contingency for 21+ days and/or an option period. If you provided a POF then I am not sure a large earnest money deposit is needed. All that it would do is end up causing an argument via title about who was correct in the case where you have a dispute about something in the contract.
If the seller gets similar contracts presented with the 10% earnest money then this may tip the scales, but I have sold hundreds of properties and I very rarely care about earnest money if the seller presents other information showing they have the capacity to perform.
I'm wholesaling in Atl, $1000 is good to get under contract. I use a 30 day period. send me the list and contact me. i'll be glad to take a look at it.
I believe there was a thread on here not too long ago where someone put down 50K EMD and when the deal fell through the seller would not sign the fund release. If I recall the amount of money was over the small claims amount of 5K so it would require a full blown court case (which could eat up money for years). The seller basically said give me 2K and I'll release it if not take me to court, I know you will win but it's your 50K tied up for years. Many people recommended just giving up the 2K and accepting it as a cost of doing business.
It did make me take a step back and reconsider EMD amounts.
EDIT##
That is the topic if you wanted to look through it.
I know someone who just lost 30k in EMD over the Title company needing to close one day later than under contract for.... I personally just typically do 1k on everything. Unless it's a big deal I MAY go a tad higher... But why? If I'm under contract, have proof of funds, and am ready to close... There should be no issue.
I have a seller with several turn key rentals he's getting rid of. I am in the process of putting 3 under contract and he is asking for 10% earnest money on each. I'm still fairly new to wholesaling but isn't that a bit much? What is the typical percentage of sale price used to determine earnest money?
Ashley
Great to hear your working hard to find good deals,
I think you should ask him why he wants 10%, I mean why not 25% or just why has he come up with this "rule". I would recommend you seek to understand his position better, to understand why is to better offer him what he needs or what you need. For instance what is the tax ramifications of the outright sale of the 3 properties, and can you come up with a better option. "disclaimer, I'm not a tax advisory" but this information could be very influential in completing this deal.
We have paid 25% and more for an EMD, we even have released portions of the EMD to secure the deal "nothing like green cash on day 1 to sway a seller in our direction". To be clear though the goal is to pay $1.00 for our EMD's on every one of them. Its all about cash flow, the bigger the upside for us the more willing we are to increase the size of the EMD.
The rules are not written down, if you put 10% down on 10 wholesale deals and make 100K you would be a huge success in my eyes. Another option is, If you know you have a buyer, and the seller wants a huge EMD consider an option contract instead. Sellers may like the idea of you buying an option for $1,500 for 2 months, or what ever you can negotiate. This will allow you to leverage your investment nest egg dramatically.
I said earlier 10 deals using 10% down, assuming $150,000 per contract that's $15,000 tied up for weeks maybe months per deal. In that time with an option you could do many more deals. Remember nothing is written down, it's all up to you. "Your not the decider" The option contract is just one of the alternatives you should offer your sellers. Liston to them and they will tell you what they want, and that will give you what you want.
@Mike Cumbie I read that post also. As a new REI I leaned something crucial from it. The OP wanted to make his offer stand out amongst others. It's possible he'll lose that money!
again, thank you all for feedback! I presented as a wholesaler, not a cash buyer. Therefore, I think 10% on each property is indeed a bit high. The only contingency was a due diligence period.
@Mike Cumbie I read that post also. As a new REI I leaned something crucial from it. The OP wanted to make his offer stand out amongst others. It's possible he'll lose that money!
@mike cumbie definitely a good article, and eye opener!