Is 10% Earnest Money too much?
Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes
Is 10% Earnest Money too much?
Most Popular Reply
Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votesOnce 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%.
74 Replies
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @James Green:
@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!
Most definitely! taking every precaution in moving forward!
- Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes10y
Originally posted by @Ashley LeBoeuf:
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
Given that you are wholesaling these properties and you have limited experience, I think I would want far more than 10%, if I were the seller.
-Christopher
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes10y
Mike
Its always a two way street.
Lets look at the seller predicament for minute ( he is selling for a reason correct ) May be too free up capital (again just role playing here). Your tying up 3 of his properties. Have you been honest with him about your actually plans. Are you buying to flip, or you actually buying them out right. Have you showed proof of funds. Again try to be in his shoes as well.
Make sure you have the right answers for his questions. Also be completely honest with your intentions. I sold many properties where the buyer could not buy. They were just playing the middle man. Which is fine as long as every one knows.
Now for fees ...earnest money. I work hard to acquire , buy and Fix my deals. So I don't want some one wasting my time either. ( again just role playing if I was the seller )
We purchased $1.2million dollar rehab apartment in Gastonia NC. Owner wanted $50k in non Refundable. We did $25k and 30 day Due Diligence. We did most of our work prior to buying. So 30 days was fine. So even then the earnest money was negotiable. Also bank proof of funds was sent. That ALWAYS helps with negotiating prices, and or earnest money.
Most of my turn key properties here in Charlotte NC. I work with Investors in Several Markets. I don't ask them to put anything down on my properties. As they sell turn key investments. So there end buyer actually locks up the property. We are good for $2500 down. Most times we take $1k if cash buyer. That goes directly to closing attorney. Each case is negotiable. As we make it Non Refundable but common sense approach. Again each sell is different.
So now in your shoes. Can you actually close, and buy these properties from this buyer. If you can not sell them by the agreed closing date. So what will you do then. Whats his recourse.
So again being honest and telling him your true intentions. At that point you both can find a happy medium. If you can buy the three properties great. Negotiate a fair earnest amount of funds. If you are just wholesaling them. Do you really need to tie them up. Work out a pre arranged fee and dates in agreement for sale. Again just trying to play
I know most real estate course or books. Say put down the least amount possible. Which I agree most times. With 16 years in this business. I can usually read right through most offers. So by showing true proof of funds and be willing to put some capital down. Your intentions are speaking louder then most.
Sorry guys if my spelling and grammar are off. I am a simple country guy who lives out in the sticks.
Hope all is well
Alex
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Alex Franks:
Mike
Its always a two way street.
Lets look at the seller predicament for minute ( he is selling for a reason correct ) May be too free up capital (again just role playing here). Your tying up 3 of his properties. Have you been honest with him about your actually plans. Are you buying to flip, or you actually buying them out right. Have you showed proof of funds. Again try to be in his shoes as well.
Make sure you have the right answers for his questions. Also be completely honest with your intentions. I sold many properties where the buyer could not buy. They were just playing the middle man. Which is fine as long as every one knows.
Now for fees ...earnest money. I work hard to acquire , buy and Fix my deals. So I don't want some one wasting my time either. ( again just role playing if I was the seller )
We purchased $1.2million dollar rehab apartment in Gastonia NC. Owner wanted $50k in non Refundable. We did $25k and 30 day Due Diligence. We did most of our work prior to buying. So 30 days was fine. So even then the earnest money was negotiable. Also bank proof of funds was sent. That ALWAYS helps with negotiating prices, and or earnest money.
Most of my turn key properties here in Charlotte NC. I work with Investors in Several Markets. I don't ask them to put anything down on my properties. As they sell turn key investments. So there end buyer actually locks up the property. We are good for $2500 down. Most times we take $1k if cash buyer. That goes directly to closing attorney. Each case is negotiable. As we make it Non Refundable but common sense approach. Again each sell is different.
So now in your shoes. Can you actually close, and buy these properties from this buyer. If you can not sell them by the agreed closing date. So what will you do then. Whats his recourse.
So again being honest and telling him your true intentions. At that point you both can find a happy medium. If you can buy the three properties great. Negotiate a fair earnest amount of funds. If you are just wholesaling them. Do you really need to tie them up. Work out a pre arranged fee and dates in agreement for sale. Again just trying to play
I know most real estate course or books. Say put down the least amount possible. Which I agree most times. With 16 years in this business. I can usually read right through most offers. So by showing true proof of funds and be willing to put some capital down. Your intentions are speaking louder then most.
Sorry guys if my spelling and grammar are off. I am a simple country guy who lives out in the sticks.
Hope all is well
Alex
Alex-
I appreciate the example. Let me clarify my situation a bit more. I have expressed my intentions from the beginning. The seller knows I am wholesaling. He already wasn't willing to negotiate purchase price because the homes are recently renovated, fair enough. I am working on 3 of his 12 or so properties. They are tenant occupied and we have discussed that the tenant could stay or leave per the end buyers preference. It is completely turn key and just looking for a new owner/ landlord. In retrospect, whether I have the property "tied up" or not, he is still getting his cash flow from those properties as well as the others. So truthfully, in this situation he isn't losing in anybway.
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes10y
Agreed
Promise just playing devils advocate as I have been on both sides of the fence.
Oh ps I love the Atlanta market been buying, selling there for a few years. We stepped out in about 2013. Once the hedge funds showed up they sure pushed up the prices. When I am out speaking or talking about Markets for International investors to purchase in. I always make sure to send them a few of our contact for Atlanta.
I try to be in Atlanta once a month my self.
Sincerely
Alex
- Las Vegas, NV · Member since 2014 · 732 posts · 137 votes10y
Just as long as you have your EMD protected, and the specific terms on the release of the funds are specified.
Good luck
- Toronto, Ontario · Member since 2014 · 615 posts · 172 votes10y
I will not give anyone 10% in the name of EM.... I will not give more than $2000. Other contingencies will be structured as part of the contract terms.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Christopher Brainard:
Originally posted by @Ashley LeBoeuf:
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
Given that you are wholesaling these properties and you have limited experience, I think I would want far more than 10%, if I were the seller.
-Christopher
Good thing you're not the seller :)
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Ndy Onyido:
I will not give anyone 10% in the name of EM.... I will not give more than $2000. Other contingencies will be structured as part of the contract terms.
I agree, thanks for the input!
- Flipper · Columbia, SC · Member since 2015 · 66 posts · 29 votes10y
Hello @Ashley LeBoeuf It sounds like you have one or more buyers already in-hand. The key to long term success is transparency and always having an out if your wholesale deal falls apart. Otherwise, you will lose money, credibility and what else is there? Great job getting the deal done!
Originally posted by @Ashley LeBoeuf:
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
Nowadays, yes, way too much. I've only purchased sub $100k properties so far but I usually put $2k of earnest money. The % varies as that's the amount I put for anywhere in the $60k-$80k range.
- Rental Property Investor · Wichita, KS · Member since 2015 · 83 posts · 45 votes10y10% is WAY too much for me. I wouldn't do it, but everyone is different and I'm still new to investing. Most I've done is $1000. I'm in Kansas but never had an issue with $500-$1000.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Lawrence Robinson:
Hello @Ashley LeBoeuf It sounds like you have one or more buyers already in-hand. The key to long term success is transparency and always having an out if your wholesale deal falls apart. Otherwise, you will lose money, credibility and what else is there? Great job getting the deal done!
Definitely! Thank you
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Justin B.:
Originally posted by @Ashley LeBoeuf:
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
Nowadays, yes, way too much. I've only purchased sub $100k properties so far but I usually put $2k of earnest money. The % varies as that's the amount I put for anywhere in the $60k-$80k range.
Thanks for the reassurance, I def agree!
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Roger Laughary:
10% is WAY too much for me. I wouldn't do it, but everyone is different and I'm still new to investing. Most I've done is $1000. I'm in Kansas but never had an issue with $500-$1000.
I've always heard $1000 was pretty standard and given the circumstance I'd say that should suffice!
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ben Leybovich What world are you living in ? LOL...
must be some little podunct mid west market ..
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ashley LeBoeuf depends on the seller.. some of the auction companies require 10% or 5 to 10k minimum.. we find we are getting some smoking deals because we can make those deposits and those that insist on puny deposits 500 to 1k well they are left in the dust
- Statesboro, GA · Member since 2015 · 99 posts · 24 votes10y
@Ashley LeBoeuf, although I feel like it's been answered enough, I'll throw in my two cents as well. 10% is a lot unless it's just a really good deal. And I mean, really good. Even if they're each $50k, that's a $15k EMD. If you have the capital and plan on double closing, that's when it wouldn't matter. But since you're just wholesaling, $1k each should be fine. But again, it really comes down to how confident you are in the numbers. I'd put up 10% each with a large enough profit gap. But I'd have to have more experience and some very trusty buyers on my list. Putting up $15k in escrow and having a clause that would let you get that back after not finding a buyer after X amount of days wouldn't help your credibility much, unless the seller is just so completely aware of the situation that he/she doesn't mind. But having $15k in escrow given back to a wholesaler just seems like it'd leave a bitter taste in any seller's mouth.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Account Closed:
@Ashley LeBoeuf, although I feel like it's been answered enough, I'll throw in my two cents as well. 10% is a lot unless it's just a really good deal. And I mean, really good. Even if they're each $50k, that's a $15k EMD. If you have the capital and plan on double closing, that's when it wouldn't matter. But since you're just wholesaling, $1k each should be fine. But again, it really comes down to how confident you are in the numbers. I'd put up 10% each with a large enough profit gap. But I'd have to have more experience and some very trusty buyers on my list. Putting up $15k in escrow and having a clause that would let you get that back after not finding a buyer after X amount of days wouldn't help your credibility much, unless the seller is just so completely aware of the situation that he/she doesn't mind. But having $15k in escrow given back to a wholesaler just seems like it'd leave a bitter taste in any seller's mouth.
My sentiments exactly! I do appreciate your two cents. Lol - I def think 15k each is steep! Especially since he is still making his rental income in the mean time. I honestly am only helping him in the situation
- Wholesaler · Melbourne, FL · Member since 2010 · 72 posts · 59 votes10y
10% earnest money is unusually high, and it is risky since earnest money is typically forfeited in the event you don't close (it is almost universally regarded as liquidated damages in the event of a suit for specific performance- which someone asked about recently in another post). It is easy to see why a seller would want the additional security, and reasonable sounding arguments about the "seriousness" of your offer-- cash, or otherwise- nothwithstanding, why put any more money at risk than you absolutely have to? 1% and a proof of funds letter ought to be enough for any seller.
- Investor · Santa Monica, CA · Member since 2014 · 17 posts · 7 votes10y
For me, the actual dollar amount (and not the percentage) is the important thing. In California (where I am) everything is expensive, so percentages tend to drive up the actual dollar amount pretty quickly. It's the dollar amount that determines my comfort level at any given time. My goal is always to give no EMD.
For the point that people are making about using a high EMD as a way to weed out wholesalers posing as cash buyers, or getting skin in the game, etc... This is may answer when a seller (who knows I'm an investor) says that to me.
"I'm an investor. I have EMDs out on multiple properties, not just yours. So I can't just put a bunch of money down on yours. It adds up quick, and doing so may end up keeping me from another deal. If you want to work with me and get this done, I'd love to buy your property. And if not, that's okay too."
Money is valuable, and just because you're a "cash buyer" doesn't mean you can throw it around with no regard. Also, I personally never put a deposit down without a contingency period where I can get it back if need be.
Best of luck!
I will go against the grain here on earnest money. My largest earnest money check was for $50k. It was on a bank owned commercial property that sat vacant for five years. Asking price was $500k and I offered $400k. The large earnest check was to get their attention and show that my offer was legit. It worked, kind of. The bank came back and said I had to close by the end of the year (three weeks away) or they get to keep my earnest money. I checked with my bank and title company and they were on board so I rolled the dice and got the property.
I typically write $10-20k earnest money checks to get the sellers attention. I have contingencies and the realtors hold the funds. I understand there is some risk but my opinion is that it is calculated and worth it. The large earnest money checks take the sting out of the low ball offers.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes10y
Originally posted by @Jay Hinrichs:
@Ben Leybovich What world are you living in ? LOL...
must be some little podunct mid west market ..
In a world where we don't buy over-priced TK crap with 10% down, Jay hahaha
- What the seller is loosing is time and the missed opportunities that go along with that once the properties are under contract. If you are confident you can move the properties at the price, then I would offer 5-10% down. If you can't afford that, then start with one property to prove yourself and maybe you will end up with more than just three.
- 10yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Ashley LeBoeuf:
Originally posted by @Alex Franks:
....
The seller knows I am wholesaling. He already wasn't willing to negotiate purchase price because the homes are recently renovated, fair enough. I am working on 3 of his 12 or so properties. They are tenant occupied and we have discussed that the tenant could stay or leave per the end buyers preference. It is completely turn key and just looking for a new owner/ landlord. In retrospect, whether I have the property "tied up" or not, he is still getting his cash flow from those properties as well as the others. So truthfully, in this situation he isn't losing in anyway.
I disagree. The fact the Owner is receiving cash flow from his properties is immaterial to your involvement - whether he engages a realtor, sells them himself, or uses your services, the existing cashflow is not part of that picture (other than it helps to sell the property to another investor).
Now, if you have tied-up a property 60-days under an agreement to purchase (under which you have no intention to perform), that's 60-days of other sales opportunities foregone. Asking for EMD of 10% in exchange is not outrageous. A better move for both of you might be for him to sell you a {transferrable} purchase option:
- it removes your obligation to perform under an agreement of sale;
- the option fee is lower than the 10% EMD (but non-refundable);
- the option can be structured to be non-exclusive (for a lower fee), allowing him to sell the property himself (perhaps only at a price higher than the option strike) if the opportunity arises.
If you find a buyer, you can simply sell them the purchase option (it's transferrable) and be done.
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